CDS Momentum: Slow Moving Credit Ratings and Cross-Market Spillovers

Lee, Jong-Sub; Naranjo, Andy; Sirmans, Stace

doi:10.2139/ssrn.2423371

Cited by 13 publications

(15 citation statements)

References 12 publications

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“…Berndt and Ostrovnaya () find that the CDS market leads the stock options market ahead of negative credit news. Lee et al () provide evidence that the CDS market contains only incremental information relative to the equity market, with spillover effects from CDS to equity‐return momentum.…”

Section: Prior Literature and Hypotheses Developmentmentioning

confidence: 99%

“…The nonpublic material information that banks trade in the CDS market is expected to be transmitted into equity and other related markets. As a result, there is an earlier price discovery in the CDS market than in the stock market and others (i.e., Acharya & Johnson, 2007;Berndt & Ostrovnaya, 2014;Lee et al, 2014;Qiu & Yu, 2012). Second, through the information-production function, CDS trading promotes more information disclosure from firm managers.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

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The externalities of credit default swaps on stock return synchronicity

Zhao

Zhu

2019

Journal of Futures Markets

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We examine the externality effect of customer firms’ credit default swap (CDS) trading on the stock price informativeness of supplier firms. Our empirical results show that firms with a high proportion of sales to CDS referenced customers tend to have more firm‐specific embedded information in their stock prices and thus higher stock price informativeness, which is associated with a lower level of stock return synchronicity. We provide new evidence of CDS trading externality on equity market information environments along the supply chain.

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Section: Prior Literature and Hypotheses Developmentmentioning

confidence: 99%

Section: Hypotheses Developmentmentioning

confidence: 99%

The externalities of credit default swaps on stock return synchronicity

Zhao

Zhu

2019

Journal of Futures Markets

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“…The literature that studies the relationship between CDS spreads and financial markets primarily links CDS spreads to market efficiency . Lee, Naranjo, and Sirmans () find that CDS momentum profits exist even though corporate CDS markets are relatively efficient. Market efficiency is also tested by studying the effects of rating events on CDS markets.…”

Section: Research Questionsmentioning

confidence: 99%

“…The literature that studies the relationship between CDS spreads and financial markets primarily links CDS spreads to market efficiency. 10 Lee, Naranjo, and Sirmans (2014) find that CDS 10 There has been at least one attempt to tie CDS spreads and ratings together in a theoretical framework. Li, Li, and Yang (2014) develop a rating based continuous time model of sovereign credit risk that captures both the cross-sectional and time series properties of sovereign credit spreads.…”

Section: Cds and Sovereign Debt Ratingsmentioning

confidence: 99%

Measuring Sovereign Risk: Are CDS Spreads Better than Sovereign Credit Ratings?

Rodríguez¹,

Dandapani²,

Lawrence

2018

Financial Management

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Using data for 54 countries over a 12‐year period, we find that the variation in average sovereign ratings in a given year can be explained by average credit default swap (CDS) spreads over the previous three years. In a horse race between CDS spreads and sovereign ratings, we find that CDS spread changes can predict sovereign events, while rating changes cannot. The predictability of CDS spreads is greater when there is disagreement between Moody's and the S&P for a country's rating.

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“…Markit provides details for each firm's CDS contract, including firm‐level ticker, country, region, industry, and credit rating composite as well as contract‐specific tier, restructuring type, currency, and depth. We use depth, which captures the number of distinct contributors to each daily CDS spread collected by Markit, as a measure of CDS liquidity (e.g., high depth indicates high liquidity—see Qiu and Yu () and Lee, Naranjo, and Sirmans (), among others) . We also obtain recovery rate information from Markit.…”

Section: Data and Variablesmentioning

confidence: 99%

Exodus from Sovereign Risk: Global Asset and Information Networks in the Pricing of Corporate Credit Risk

Lee¹,

Naranjo²,

Sirmans

2016

The Journal of Finance

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Using five-year credit default swap (CDS) spreads on 2,364 companies in 54 countries from 2004 to 2011, we find that firms exposed to stronger property rights through their foreign asset positions (institutional channel) and firms cross-listed on exchanges with stricter disclosure requirements (informational channel) reduce their CDS spreads by 40 bps for a one-standard-deviation increase in their exposure to the two channels. These channels capture effects beyond those associated with firm-and country-level fundamentals. Overall, we find that firm-level global asset and information connections are important mechanisms to delink firms from their sovereign and country risks.

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CDS Momentum: Slow Moving Credit Ratings and Cross-Market Spillovers

Cited by 13 publications

References 12 publications

The externalities of credit default swaps on stock return synchronicity

The externalities of credit default swaps on stock return synchronicity

Measuring Sovereign Risk: Are CDS Spreads Better than Sovereign Credit Ratings?

Exodus from Sovereign Risk: Global Asset and Information Networks in the Pricing of Corporate Credit Risk

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