Credit Risk Discovery in the Stock and CDS Markets: Who Leads, When, and Why‘
40 Pages Posted: 28 Jul 2008 Last revised: 18 Dec 2009
Date Written: December 17, 2009
This paper analyzes the dynamic relationship between CDS spreads and stock market implied credit spreads (ICS) for a large international set of companies during the period 2002-2004. We find the relationship between these credit spread measures to be stronger, and the probability of the stock market leading credit risk discovery to be higher, at the lower credit quality levels. However, consistent with the argument of insider trading in credit derivatives, we document a positive relationship between the frequency of severe credit downturns and the probability of the CDS market leading price discovery. Apart from these findings, our results suggest a slight informational dominance of the stock market that declines over time.
Keywords: Credit risk, credit default swap, price discovery
JEL Classification: G14
Suggested Citation: Suggested Citation