We analyse daily lead-lag patterns in US equity and credit default swap (CDS) returns. We first document that equity returns robustly lead CDS returns. However, we find that the CDS-lag is due to common (and not firm-specific) news and arises predominantly in response to positive (instead of negative) equity market news. We provide an explanation for this news-specific price discovery based on dealers in the CDS market exploiting their informational advantage vis-à-vis institutional investors with hedging demands. In support of this explanation we find that the CDS-lag and its news-specificity are related to various firm-level proxies for hedging demand in the cross-section as well measures for economy-wide informational asymmetries over time.
# 12-033/IV/DSF33 (2012-04-02)
- Ian W. Marsh, Cass Business School; Wolf Wagner, Tilburg University, and Duisenberg school of finance
- price discovery, hedging demand, CDS markets, equity markets
- JEL codes:
- G1, G12, G14