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Insider Trading in Credit Derivatives

Viral V. Acharya
London Business School - Institute of Finance and Accounting; Stern School of Business; Centre for Economic Policy Research (CEPR)

Timothy C. Johnson
London Business School; University of Illinois


July 2005


Abstract:     
Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) market under circumstances consistent with the use of non-public information by informed banks. Specifically, the information revelation occurs only for negative credit news and for entities that subsequently experience adverse shocks. Moreover the degree of advance information revelation increases with the number of banks that have lending/monitoring relations with a given firm, and this effect is robust to controls for non-informational trade. We find no evidence, however, that the degree of asymmetric information adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.

Keywords: adverse selection, default, bank relationship, credit default swaps, asymmetric information, liquidity

JEL Classifications: G12, G13, G14, G20, D8

Working Paper Series

Date posted: August 02, 2005 ; Last revised: May 03, 2006

Suggested Citation

Acharya, Viral V. and Johnson, Timothy C., Insider Trading in Credit Derivatives (July 2005). Available at SSRN: http://ssrn.com/abstract=767864


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Contact Information

Viral V. Acharya (Contact Author)
London Business School - Institute of Finance and Accounting ( email )
Sussex Place
Regent's Park
London NW1 4SA United Kingdom
+44 20 7262 5050 x3535 (Phone)
+44 20 7724 3317 (Fax)
Stern School of Business ( email )
44 West 4th Street
New York, NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR United Kingdom
Tim Johnson
London Business School ( email )
Sussex Place
Regent's Park
London NW1 4SA NW1 4SA
United Kingdom
University of Illinois ( email )
Urbana
Champaign, IL 61820
United States
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