The Analysis of Insider Trading on Credit Derivatives Market by Means of the Event Study Methodology
46 Pages Posted: 6 Jan 2013 Last revised: 10 Jan 2013
Date Written: January 6, 2013
Abstract
In this article I investigate the information flow between credit default swap market and equity market as well as insider trading on credit default swap market.
I apply the event study methodology. By means of the event study methodology I compute abnormal stock returns and abnormal credit default swap premium changes. The research was based on 175 874 observations collected for 92 entities from 2001 to 2010.
The results show that the information flow from credit default swap market to equity market is the most significant with regard to rating’s negative perspective. The information flow is much less acute in relation to the negative surprise at the annual earnings announcement and rating’s upgrade. The evidence of insider trading is also the most visible with reference to rating’s negative perspective. Additionally, the distinctive feature of credit default swap market and equity market is the asymmetrical reaction to negative and positive credit information.
The event study methodology does not consider other potentially important reasons for the information flow between markets than actually investigated. The credit events and credit risk information used in this research is just a proposal and can be enlarged by future researchers.
This article discusses new research area. The main research field with regard to insider trading remains equity market with special focus on the US market. I decided to explore insider trading phenomenon on the credit default swap market. I consider only contracts that are quoted with reference to the European underlying assets. This part of the financial market is attractive in terms of the economic research as credit derivatives are more commonly used not only in North America but also in Europe.
Keywords: insider trading, information flow, event study, credit derivatives
JEL Classification: G14, G21, G24
Suggested Citation: Suggested Citation
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