Is default risk priced equally fast in the credit default swap and the stock markets?:An empirical investigation

Abstract

We examine whether default risk is priced equally fast in the credit default swap (CDS) and the stock markets in the main economic sectors of North America, Europe, the UK, and Asia. We find significant evidence in all of these regions and economic sectors that the stock market leads the price discovery process because it reflects default risk faster than the CDS market. We also find weak evidence that the documented lead-lag relation is not regime-dependent and that is stronger for negative stock market news. Our findings do not confirm the theoretical prediction that the CDS market responds faster than the stock market to changing credit conditions. Consistent with the market selection theories, our findings imply that informed traders prefer to trade default risk mostly in the stock market but uninformed traders mostly in the CDS market.

Publication DOI: https://doi.org/10.1016/j.intfin.2017.09.029
Divisions: College of Business and Social Sciences > Aston Business School
College of Business and Social Sciences > Aston Business School > Accounting
Additional Information: Copyright:©2017 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
Uncontrolled Keywords: Credit default swaps ,Informational efficiency ,Lead-lag relation ,Price discovering
Publication ISSN: 1873-0612
Last Modified: 30 Sep 2024 11:18
Date Deposited: 24 Oct 2017 12:20
Full Text Link:
Related URLs: http://www.scie ... 042443117304560 (Publisher URL)
PURE Output Type: Article
Published Date: 2017-11-01
Published Online Date: 2017-09-22
Accepted Date: 2017-09-21
Authors: Tolikas, Konstantinos (ORCID Profile 0000-0001-8281-0709)
Topalogou, Nikolas

Download

[img]

Version: Published Version

License: Creative Commons Attribution

| Preview

[img]

Version: Accepted Version

Access Restriction: Restricted to Repository staff only

License: Creative Commons Attribution Non-commercial No Derivatives


Export / Share Citation


Statistics

Additional statistics for this record