Dynamics and Determinants of Credit Risk Discovery: Evidence from CDS and Stock Markets

40 Pages Posted: 2 Feb 2016

See all articles by Frankie Chau

Frankie Chau

Durham University Business School

Chulwoo Han

Durham University; Capital Markets & Portfolio Research, Inc.

Shimeng Shi

Australian National University (ANU)

Date Written: January 31, 2016

Abstract

This paper investigates the dynamics and drivers of credit risk discovery between stock and CDS markets in the US. Our research is distinguished from the existing literature in three aspects: 1) We employ an improved method to measure the information share; 2) we discover new drivers of credit risk discovery; and 3) we assess the impact of central clearing counterparty (CCP) on the CDS market. By using the generalized information share (GIS) by Lien and Shrestha (2014), we address the issue that the CDS and stock prices do not have one-to-one cointegration relation. The empirical results support the use of GIS instead of more conventional measures. We also find that eliminating transitory price components increases the information share of the CDS market in the earlier period of the sample. The economic condition and funding cost turn out to affect the information share of the CDS market negatively. Another interesting finding is that the CDS of investment grade firms possess higher information shares compared to speculative grade firms. Finally, CCP seems to reduce the information share of CDS, which suggests that the CDS market is driven largely by insider trading.

Keywords: credit risk discovery, generalized information share, determinants of credit risk discovery

JEL Classification: G12, G14, G28

Suggested Citation

Chau, Frankie and Han, Chulwoo and Shi, Shimeng, Dynamics and Determinants of Credit Risk Discovery: Evidence from CDS and Stock Markets (January 31, 2016). Available at SSRN: https://ssrn.com/abstract=2725596

Frankie Chau (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Chulwoo Han

Durham University ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Capital Markets & Portfolio Research, Inc. ( email )

Room 312 Bldg 314
Seoul National University
Seoul, 151-742
Korea
+82 2 872 7131 (Phone)

Shimeng Shi

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
6
Abstract Views
75
PlumX Metrics