Informed Trading and Variations in Trading Volume and Liquidity: Evidence from Index CDSs

Abstract

Using high-frequency intraday quotes and trading data, we investigate the interplay of volume, volatility, and trading costs in the index CDS market. Unlike the U-shaped trading pattern in the equity market, index CDSs exhibit a hump-shaped intraday pattern. Moreover, when trading volume is higher, transaction costs are lower and price is less informative. We also find that order imbalances before active trading are informative about CDS returns. The results are stronger around macroeconomic news releases and periods with larger information asymmetry. In particular, we use the COVID-19 pandemic as an exogenous shock to the level of informed trading and find that the pandemic appears to amplify the return explanatory power of order imbalances before active trading hours. Collectively, our results show the strategic trading behavior in the index CDS market that informed traders trade earlier to exploit their informational advantages, while liquidity traders postpone their trades.

Keywords: informed trading, index CDSs, intraday trading pattern, trading costs, COVID-19

JEL Classification: G12, G13, G14