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Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets

Author

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  • Hilscher, Jens
  • Pollet, Joshua M.
  • Wilson, Mungo
Abstract
This article provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, whereas credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity market rather than the credit default swap (CDS) market. These findings are consistent with standard theories of market selection by informed traders in which market selection is determined partially by transaction costs. We also find that credit protection returns respond more quickly during salient news events (earnings announcements) compared to days with similar equity returns and turnover. This evidence provides support for explanations related to investor inattention.

Suggested Citation

  • Hilscher, Jens & Pollet, Joshua M. & Wilson, Mungo, 2015. "Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(3), pages 543-567, June.
    • Handle: RePEc:cup:jfinqa:v:50:y:2015:i:03:p:543-567_00
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    References listed on IDEAS

    as
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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