The Lead-Lag Relationship between the Stock Market and CDS Market in Korea

Abstract

This study examines the lead-lag relationship between the stock market and CDS market in Korea using the firm-level data during 2006-2009. Our main findings can be summarized as follows. First, our empirical finding shows that stock returns Granger cause CDS spread changes for a larger number of firms than vice versa. Second, the sub-sample analysis reveals that while the stock market leads the CDS market in each sub-sample, the lead-lag relationship is more pronounced in the post-crisis period. Finally, our main findings remain the same even in the presence of controlling variables such as equity volatilities, absolute bid-ask spreads, and CDS premium on foreign exchange stabilization bonds issued by Korean government. In sum, consistent with the U. S. and U. K. evidence, it appears that the stock market leads the CDS market in Korea.

Does information environment affect information spillover between the CDS and stock markets in Korea?

“…Furthermore, Park et al (2021) discovered, through the analysis of stock prices and CDS spreads of the US firms, that the information environment of a company significantly influences the information transmission from the stock market to the CDS market. Bae et al (2010) find that, in Korea, stock prices predict the CDS spreads in a negative direction, indicating that the stock market leads the CDS market.…”

“…This study aims to build upon the insights of Park et al (2021) and extend them beyond the findings of Bae et al (2010) in the Korean market. Specifically, we examined how the information environment of companies in the Korean market influences price movements from the stock market to the CDS market.…”

“…Third, this is the first study to explore the impact of a company's information environment on the information transmission from the stock market to the Korean CDS market. Studies on individual companies' CDS, including those by Bae et al (2010), generally have shorter sample periods and often do not incorporate recent data. Moreover, recent studies using current data have primarily focused on analyzing the information transmission between stock market indices and sovereign CDS spreads, rather than conducting analyses specifically related to individual companies.…”

“…This study aims to build upon the insights of Park et al. (2021) and extend them beyond the findings of Bae et al. (2010) in the Korean market.…”

“…Third, this is the first study to explore the impact of a company’s information environment on the information transmission from the stock market to the Korean CDS market. Studies on individual companies’ CDS, including those by Bae et al. (2010), generally have shorter sample periods and often do not incorporate recent data.…”