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

38 Pages Posted: 19 Sep 2012

See all articles by Lamia Bekkour

Lamia Bekkour

Luxembourg School of Finance

Thorsten Lehnert

University of Luxembourg

Maria Chiara Amadori

Maastricht School of Business and Economics

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Date Written: November 1, 2011

Abstract

In this study, we investigate the dynamics behind informed investors’ trading decisions among Eu-ropean stock, options and credit default swap markets. This allows us to identify the predictive ex-planatory 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 CDS market and the other markets, in which changes in CDS spreads are able to consistently forecast changes in stock prices and equity options’ implied volatilities pointing out how the fast growing CDS market seems to play a special role in the price discovery process. Moreover, in contrast to US results, the stock market is found to forecast changes in the other two markets suggesting that investors also prefer stock market involvement to exploit their information advantages and then move to CDS and option markets. Interestingly, those patterns have only emerged during the recent financial crisis, while before the crisis the option market was found to be of major importance in the price discovery process.

Keywords: Credit default swap spread, option-implied volatility, lead-lag relationship, price discovery, informed trading

JEL Classification: G13, G14

Suggested Citation

Bekkour, Lamia and Lehnert, Thorsten and Amadori, Maria Chiara, The Relative Informational Efficiency of Stocks, Options and Credit Default Swaps (November 1, 2011). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2080052 or http://dx.doi.org/10.2139/ssrn.2080052

Lamia Bekkour (Contact Author)

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

Thorsten Lehnert

University of Luxembourg ( email )

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

Maria Chiara Amadori

Maastricht School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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