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Insider Trading in Credit Derivatives

50 Pages Posted: 2 Aug 2005  

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Timothy C. Johnson

London Business School; University of Illinois

Multiple version iconThere are 3 versions of this paper

Date Written: July 2005

Abstract

Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) market under circumstances consistent with the use of non-public information by informed banks. Specifically, the information revelation occurs only for negative credit news and for entities that subsequently experience adverse shocks. Moreover the degree of advance information revelation increases with the number of banks that have lending/monitoring relations with a given firm, and this effect is robust to controls for non-informational trade. We find no evidence, however, that the degree of asymmetric information adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.

Keywords: adverse selection, default, bank relationship, credit default swaps, asymmetric information, liquidity

JEL Classification: G12, G13, G14, G20, D8

Suggested Citation

Acharya, Viral V. and Johnson, Timothy C., Insider Trading in Credit Derivatives (July 2005). Available at SSRN: https://ssrn.com/abstract=767864 or http://dx.doi.org/10.2139/ssrn.767864

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Tim Johnson

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

University of Illinois ( email )

601 E John St
Champaign, IL 61820
United States

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