Time-Varying Credit Risk Discovery in the Stock and CDS Markets: Evidence from Quiet and Crisis Times
European Financial Management, 2015, Vol. 21, 430-461.
Posted: 12 Apr 2012 Last revised: 13 Feb 2023
Date Written: April 3, 2013
Abstract
We analyze the dynamic relationship between the stock and the CDS market during the period 2002-2008. We document that the stock market’s informational dominance reported in previous studies holds only in times of financial crisis. During tranquil times, the CDS market’s contribution to price discovery is equal or higher than that of the stock market. Moreover, the credit risk level of the company has a positive effect on the information share of its stocks beyond the effect of the overall state of the economy. We show that these conclusions do not contradict the argument of insider trading in credit derivatives.
Keywords: Credit risk, credit default swap market, stock market, price discovery
JEL Classification: G12, G14
Suggested Citation: Suggested Citation