Why is Price Discovery in Credit Default Swap Markets News-Specific?

43 Pages Posted: 5 Feb 2012

See all articles by Ian W. Marsh

Ian W. Marsh

City University London - Sir John Cass Business School

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2012

Abstract

We analyse daily lead-lag patterns in US equity and credit default swap (CDS) returns. We first document that equity returns robustly lead CDS returns. However, we find that the CDS-lag is due to common (and not firm-specific) news and arises predominantly in response to positive (instead of negative) equity market news. We provide an explanation for this news-specific price discovery based on dealers in the CDS market exploiting their informational advantage vis-à-vis institutional investors with hedging demands. In support of this explanation we find that the CDS-lag and its news-specificity are related to various firm-level proxies for hedging demand in the cross-section as well as measures for economy-wide informational asymmetries over time.

Keywords: credit default swaps, price discovery, informational efficiency, hedging demand

JEL Classification: G12, G15, G21

Suggested Citation

Marsh, Ian William and Wagner, Wolf, Why is Price Discovery in Credit Default Swap Markets News-Specific? (February 1, 2012). Bank of Finland Research Discussion Paper No. 6/2012. Available at SSRN: https://ssrn.com/abstract=1998190 or http://dx.doi.org/10.2139/ssrn.1998190

Ian William Marsh (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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