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

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

doi:10.2139/ssrn.1718653

Cited by 38 publications

(33 citation statements)

References 27 publications

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“…They find that the average percentage bid-ask spreads are higher for CDSs than for equity. If I used the percentage measure for CDS liquidity costs, I would reach the same conclusions of Hilscher et al (2015): the percentage bid-ask spread for CDSs over the period 2003-2007 results equal to 10.48 bps on average (median 9.8 bps), so it is higher that the equity market average bid-ask of 7.40 bps (median 4.3 bps), while the absolute CDS bid-ask spread is on average only 5.13 bps (median 5 bps). By favouring the measurement of CDS liquidity costs as absolute bid-ask spreads for the reasons exposed above and by including the period 2007-2009, I find that liquidity costs appear lower for CDS contracts than for equity on average.…”

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confidence: 74%

“…In the existing literature, the CDS bid-ask spread has been measured by the difference between ask and bid quotes (absolute bid-ask spread, as in Coro et al 2013, andPires et al 2015), or by this difference normalized by the mid-quote point (percentage bid-ask spread, as for example in Hilscher et al 2015). I favour the former measurement: Pires et al (2015) provide a convincing numerical argument and show that since the CDS bid-ask spread is already a proportional measure there is no need to divide it by the mid-quote (as it is done instead for the equity bid-ask spread).…”

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confidence: 99%

“…Outside these periods, little or no co-movement is observable. 13 Hilscher et al (2015) compare CDS and equity percentage bid-ask spreads over a sample that goes from 2001 to 2007. They find that the average percentage bid-ask spreads are higher for CDSs than for equity.…”

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confidence: 99%

“…42 For this purpose, I set T ¼ 5 (maturity of the CDS contracts) and r equal to the 1-month T-Bill yield. 43 The analysis also repeats some of the steps of the paper by Hilscher et al (2015), using however a timesample which includes also the crisis period (2007)(2008)(2009). 44 The reported results are obtained from Granger-causality tests including only two lags of the variables.…”

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confidence: 99%

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Explaining co-movements between equity and CDS bid-ask spreads

Marra

2016

Rev Quant Finan Acc

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In this paper I show that the co-movements between bid-ask spreads of equities and credit default swaps vary over time and increase over crisis periods. The co-movements are strongly related to systematic risk factors and to the theoretical debt-to-equity hedge ratio. I document that hedging and asymmetric information, besides higher funding costs and market volatility risk, are driving factors of the commonality and are significantly priced in CDS bid-ask spreads.

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confidence: 74%

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confidence: 99%

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confidence: 99%

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confidence: 99%

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Explaining co-movements between equity and CDS bid-ask spreads

Marra

2016

Rev Quant Finan Acc

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“…33 In addition, we follow Lee, Naranjo, and Sirmans (2014) Berndt and Obreja (2010) and Hilscher, Pollet, and Wilson (2014) for a description of how to calculate "clean" CDS returns).…”

Section: Abnormal Announcement Returns In the Fixed Income Marketmentioning

confidence: 99%

Are Corporate Spin-Offs Prone to Insider Trading?

Augustin

Brenner

et al. 2015

SSRN Journal

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Recent research has documented empirical evidence of informed trading ahead of major corporate events such as earnings announcements, mergers and acquisitions (M&A) and corporate bankruptcies. Surprisingly, however, no such evidence exists ahead of corporate divestiture or spinoff (SP) announcements. This is noteworthy because the parent company's stock usually experiences a price jump at the time of the deal announcement, similar to the M&A target, which suggests that there exist economic gains from trading on private information. We first present evidence of average abnormal stock announcement returns of approximately 2%, with greater abnormal returns for cross-industry spinoffs, deals that reflect a greater fraction of a parent's market capitalization, and if the subsidiary is incorporated in the same state. We then investigate informed trading activity in stocks and equity options prior to the announcement of corporate SPs for a sample of 426 US parents over the time period January 1996 to December 2013. For the parent companies, we document pervasive directional activity in options, but not in stocks, consistent with strategies that could yield very high abnormal returns to investors with private information. This is evidenced by positive abnormal trading volumes and excess implied volatility for options prior to SP announcements. However, strikingly, there is no evidence of abnormal volumes or returns for stocks. The effects are stronger for call options than for put options, in particular for out-of-the-money (OTM) and at-the-money (ATM) options. High frequency data confirms the presence of unusual net buying activity in the options market, but not the stock market. We also find that abnormal options volume is the only measure of informed trading that positively and robustly predicts abnormal announcement returns. We also examine informed trading in the fixed income market using bond and CDS data, but find no such evidence. All our results are robust to a propensity-matched control sample based on the probability of being divested.

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