Bond Volatility and CDS Auctions

55 Pages Posted: 24 Dec 2019 Last revised: 13 Jan 2020

See all articles by Jennifer Mace

Jennifer Mace

Independent

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Ran Zhao

Claremont Graduate University, Drucker School of Management

Date Written: December 2, 2019

Abstract

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

Mace, Jennifer and Yu, Fan and Zhao, Ran, Bond Volatility and CDS Auctions (December 2, 2019). Available at SSRN: https://ssrn.com/abstract=3497729 or http://dx.doi.org/10.2139/ssrn.3497729

Jennifer Mace

Independent ( email )

Fan Yu (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

Ran Zhao

Claremont Graduate University, Drucker School of Management ( email )

150 E. Tenth Street
Claremont, CA 91711
United States

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