Do Equity Markets Favor Credit Markets News Over Options Market News?

Abstract

Credit default swap and equity options markets often experience abnormal swings prior to the announcement of negative credit news. Option prices reveal information about such forthcoming adverse events at least as early as credit spreads, except for negative earnings announcements. Prior to negative credit news being announced, the equity market does not respond to abnormal movements in option prices unless that information has also manifested itself in credit spreads, perhaps because options are perceived as more likely to trade on unsubstantiated rumors than default swaps.

Keywords: Credit and equity derivatives, Lead-lag analysis, Accounting scandals, Negative Earnings, Leveraged buyouts

JEL Classification: G12, G13, G14, D8