Price Discovery in the CDS Market: The Informational Role of Equity Short Interest

Posted: 11 Jun 2016

See all articles by Paul A. Griffin

Paul A. Griffin

University of California, Davis - Graduate School of Management

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Jeong-Bon Kim

City University of Hong Kong

Date Written: June 6, 2016

Abstract

This paper documents a negative relation between equity short interest and future returns on credit default swaps (CDS). This relation is most consistent with the theory that equity short interest telegraphs relevant information to secondary market CDS investors about credit spread not transmitted into prices in other ways. The CDS return predictive pattern also strengthens negatively for equity short-interest positions subject to an outward shift in the demand for shortable stocks, which we view as a proxy for the expected benefits of private information (Cohen et al. 2007). This suggests that features of the shorting market may help explain the lagged response of CDS spreads to equity short interest. Our tests of economic significance, however, do not support the view that the CDS return predictive pattern is strong enough to cover the round-trip cost of trading in the secondary CDS market.

Keywords: Equity short interest, Credit default swaps, Credit spreads, Lagged price discovery

JEL Classification: G12, G14, G24, M41

Suggested Citation

Griffin, Paul A. and Hong, Hyun A. and Kim, Jeong-Bon, Price Discovery in the CDS Market: The Informational Role of Equity Short Interest (June 6, 2016). Review of Accounting Studies, 2016, Available at SSRN: https://ssrn.com/abstract=2793609

Paul A. Griffin (Contact Author)

University of California, Davis - Graduate School of Management ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,059
PlumX Metrics