The Relative Informational Efficiency of Stocks, Options and Credit Default Swaps

32 Pages Posted: 12 May 2011

See all articles by Maria Chiara Amadori

Maria Chiara Amadori

Maastricht School of Business and Economics

Thorsten Lehnert

University of Luxembourg

Lamia Bekkour

Luxembourg School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2011

Abstract

In this study, we investigate the dynamics behind informed investors’ trading decisions among European stock, options and credit default swap markets. This allows us to identify the predictive explanatory power of the unique information contained in each market with respect to future stock, CDS and option market movements. A lead-lag relation is found between the options and CDS market in which changes in equity options’ implied volatility are able to consistently forecast changes in CDS spreads pointing out how the option market seems to play a special role in the price discovery process even in the presence of a very fast growing competitive market like the CDS market. Moreover, in contrast to US results, the stock market is found to forecast changes in the other two markets suggesting that investors first prefer stock market involvement to exploit their information advantages and then move to CDS and option markets. Although this is the case, the CDS market seems to gain importance in the price discovery process as firms’ become more risky.

Suggested Citation

Amadori, Maria Chiara and Lehnert, Thorsten and Bekkour, Lamia, The Relative Informational Efficiency of Stocks, Options and Credit Default Swaps (May 1, 2011). International Conference of the French Finance Association (AFFI), May 11-13, 2011. Available at SSRN: https://ssrn.com/abstract=1836894 or http://dx.doi.org/10.2139/ssrn.1836894

Maria Chiara Amadori (Contact Author)

Maastricht School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Thorsten Lehnert

University of Luxembourg ( email )

6, rue Coudenhove-Kalergi
Luxembourg, L-1359
Luxembourg

Lamia Bekkour

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

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