CDS Market Transparency and Equity Market Quality
29 Pages Posted: 15 May 2015 Last revised: 5 Sep 2019
Date Written: September 2, 2019
Following the recent financial crisis, increasing the transparency of credit default swap (CDS) markets has been a popular goal among regulators. We examine how changes in the transparency of the CDS market can impact liquidity in the corresponding equity market. We first extend a model of insider trading to include a public signal of firm value, and show that increasing the precision of this signal can lead to higher price impacts. This finding has important real-world implications for equity market quality: a difference-in-differences approach shows that, following the increase in CDS market transparency after the so-called CDS market "Big Bang," stocks with CDS contracts faced greater price impact and higher illiquidity than stocks without CDS traded.
Keywords: Market Transparency, Price Impact, CDS Markets, Stock Markets
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation