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

Hilscher, Jens; Pollet, Joshua Matthew; Wilson, Mungo Ivor

doi:10.1017/s0022109015000228

Cited by 123 publications

(64 citation statements)

References 30 publications

(47 reference statements)

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“…To avoid introducing model dependencies, we define CDS "returns" as log-differences in daily end-of-day CDS spreads. This is in line with the definition of CDS returns used in the work of Longstaff et al (2011) and Hilscher et al (2015), amongst others. 5 We append each issuer's CDS data with their credit ratings from Moody's.…”

Section: Cds Datasupporting

confidence: 84%

Excess comovement in credit default swap markets: Evidence from the CDX indices

Cathcart

El-Jahel

Evans

et al. 2019

Journal of Financial Markets

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We provide evidence of excess comovement in the credit default swap (CDS) market following inclusions to and exclusions from investment grade and high yield CDX indices during the 2003-2016 period. We find that when a name joins an index, its return tends to covary more with the returns of that index and conversely when it is excluded from an index, its return tends to covary less with it. We use univariate regressions and a difference-indifference approach to show that the CDS market is impacted by indexation. This excess comovement indicates a departure from fundamental-based pricing and provides support in favour of style investing.

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Section: Cds Datasupporting

confidence: 84%

Excess comovement in credit default swap markets: Evidence from the CDX indices

Cathcart

El-Jahel

Evans

et al. 2019

Journal of Financial Markets

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show abstract

“…Moreover, CDS are more sensitive to the stock market than to bond markets. Hilscher, Pollet, and Wilson (2015) confirm these findings in a more recent sample period.…”

Section: Introductionsupporting

confidence: 83%

Credit Variance Risk Premiums

Ammann

Mörke

2019

SSRN Journal

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This paper studies variance risk premiums in the credit market. Using a novel data set of swaptions quotes on the CDX North America Investment Grade index, we find that returns of credit variance swaps are negative and economically large. Shorting variance swaps yields an annualized Sharpe ratio of almost six, eclipsing its counterpart in fixed income or equity markets. The returns remain highly statistically significant when accounting for transaction costs, cannot be explained by established risk-factors, and hold for various investment horizons. We also dissect the overall variance risk premium into payer and receiver variance risk premiums. We find that exposure to both parts is priced. However, the returns for payer variance, associated with bad economic states, are roughly twice as high in absolute terms.JEL classification: G12, G13.

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“…To capture the lead–lag dynamics of insurers’ stock return volatility and the idiosyncratic attention measures ASVI and CSI, we perform vector autoregressions (VARs). We follow Hilscher, Pollet, and Wilson () and estimate pooled VARs using OLS regressions with firm fixed effects and up to four lags of volatility and ASVI. The regressions are of the following type:

\begin{matrix} right {normalVOLATILITY}_{i, t} & center = & left α_{1} + \sum_{k = 1}^{4} β_{k} \times {normalGOOGLE}_{i, t - k} + \sum_{k = 1}^{4} γ_{k} \times {normalVOLATILITY}_{i, t - k} + ϵ_{i, t} \\ right & center & left \end{matrix}

\begin{matrix} right {normalGOOGLE}_{i, t} & center = & left α_{2} + \sum_{k = 1}^{4} δ_{k} \times {normalGOOGLE}_{i, t - k} + \sum_{k = 1}^{4} η_{k} \times {normalVOLATILITY}_{i, t - k} + ε_{i, t}, \\ right & center & left \end{matrix}

where

{GOOGLE}_{i, t}

is either

{ASVI}_{i, t}

{CSI}_{i, t}

.…”

Section: Resultsmentioning

confidence: 99%

Crisis Sentiment in the U.S. Insurance Sector

Irresberger¹,

König²,

Weiß³

2016

J of Risk & Insurance

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We use Internet search volume data to measure idiosyncratic and market‐wide crisis sentiment to explain insurer stock return volatility. We find that market‐level crisis sentiment was a significant predictor of stock return volatility of U.S. insurers between 2006 and 2010. Higher levels of crisis sentiment are associated with higher levels of price uncertainty. This effect is strongest for insurers with less exposure to the adverse effects of the financial crisis. Further, crisis sentiment also affects the cross‐section of movements in insurer stock prices. Our results imply that investors exited insurer stocks mainly due to crisis sentiment rather than a rational assessment of the insurers’ actual exposure to the crisis.

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

Cited by 123 publications

References 30 publications

Excess comovement in credit default swap markets: Evidence from the CDX indices

Excess comovement in credit default swap markets: Evidence from the CDX indices

Credit Variance Risk Premiums

Crisis Sentiment in the U.S. Insurance Sector

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