Are Credit Default Swaps a Sideshow? Evidence that Information Flows from Equity to CDS Markets

Hilscher, Jens; Pollet, Joshua Matthew; Wilson, Mungo Ivor

doi:10.2139/ssrn.1718653

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Are Credit Default Swaps a Sideshow? Evidence that Information Flows from Equity to CDS Markets

37 Pages Posted: 3 Dec 2010 Last revised: 1 Jun 2013

See all articles by Jens Hilscher

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Mungo Ivor Wilson

University of Oxford - Said Business School

Date Written: May 28, 2013

Abstract

This paper provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, while credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity rather than the CDS market. These findings are consistent with standard theories of market selection by informed traders in which market selection is determined partially by transaction costs. We also find that credit protection returns respond more quickly during salient news events (earnings announcements) compared to days with similar equity returns and turnover. This evidence provides support for explanations related to investor inattention.

Keywords: CDS, market segmentation, inattention

JEL Classification: G12

Suggested Citation: Suggested Citation

Hilscher, Jens and Pollet, Joshua Matthew and Wilson, Mungo Ivor, Are Credit Default Swaps a Sideshow? Evidence that Information Flows from Equity to CDS Markets (May 28, 2013). Available at SSRN: https://ssrn.com/abstract=1718653 or http://dx.doi.org/10.2139/ssrn.1718653