Bond Volatility and CDS Auctions
55 Pages Posted: 24 Dec 2019 Last revised: 13 Jan 2020
Date Written: December 2, 2019
We document a higher bond return volatility around the time of default for bonds included in CDS auctions (especially cheapest-to-deliver bonds) versus those that are not, while controlling for firm fundamentals and bond illiquidity. This finding does not extend to time periods far ahead of default, and there is no significant difference between the idiosyncratic stock return volatility of CDS firms and non-CDS firms around the time of default. These results are more consistent with CDS buyers and sellers manipulating bond prices to achieve favorable CDS auction outcomes, rather than a spillover of price discovery by CDS traders into the stock and bond markets.
Keywords: bond volatility, corporate default, CDS auction, market manipulation
JEL Classification: G12, G13, G14, G23, G33
Suggested Citation: Suggested Citation