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The Information Content of Cross-Market Deviations in Option Prices and Credit Default Swap Spreads

51 Pages Posted: 25 Jan 2012 Last revised: 12 Jul 2013

Georgios Angelopoulos

Bank of England, PRA

Daniel Giamouridis

Bank of America - Bank of America Merrill Lynch; Athens University of Economics and Business; City University London - Cass Business School - Faculty of Finance; EDHEC Risk Institute

Georgios Nikolakakis

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: July 1, 2013

Abstract

Cross-market deviations in equity put option prices and credit default swap spreads are temporal and revert to their usual level shortly after they occur, on average within about one week. The process of reversion involves predictable and economically significant changes also in the equity values of the reference firm, thus empirically supporting the theoretical linkage of the three markets. Cross-market deviations occur for firms with high information uncertainty and are not created equally. Firms with unusually more expensive credit than equity insurance are likely to experience informed trading in their credit insurance contract. However, we attribute instances of unusually expensive equity insurance to belief heterogeneity.

Keywords: credit equity market integration, equity return predictability, capital structure arbitrage

JEL Classification: G11, G12, G13, G14, D8

Suggested Citation

Angelopoulos, Georgios and Giamouridis, Daniel and Nikolakakis, Georgios, The Information Content of Cross-Market Deviations in Option Prices and Credit Default Swap Spreads (July 1, 2013). Available at SSRN: https://ssrn.com/abstract=1991179 or http://dx.doi.org/10.2139/ssrn.1991179

Georgios Angelopoulos

Bank of England, PRA

20 Moorgate
London, EC2R 6DA
United Kingdom

Daniel Giamouridis (Contact Author)

Bank of America - Bank of America Merrill Lynch ( email )

United Kingdom

Athens University of Economics and Business ( email )

Department of Accounting and Finance
Greece

City University London - Cass Business School - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

EDHEC Risk Institute ( email )

Lille
France

Georgios Nikolakakis

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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