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
Date Written: May 28, 2013
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