CDS Market Transparency and Equity Market Quality

29 Pages Posted: 15 May 2015 Last revised: 5 Sep 2019

See all articles by Marlene Haas

Marlene Haas

Independent

Julia Reynolds

University of Lugano - Institute of Finance

Date Written: September 2, 2019

Abstract

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

Haas, Marlene and Reynolds, Julia, CDS Market Transparency and Equity Market Quality (September 2, 2019). Available at SSRN: https://ssrn.com/abstract=2606164 or http://dx.doi.org/10.2139/ssrn.2606164

Marlene Haas

Independent

No Address Available

Julia Reynolds (Contact Author)

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

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