When do CDS spreads lead? Rating events, private entities, and firm-specific information flows

Lee, Jong-Sub; Naranjo, Andy; Velioglu, Guner

doi:10.1016/j.jfineco.2018.07.011

Cited by 98 publications

(44 citation statements)

References 24 publications

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“…Indeed, Acharya and Johnson (2007), Qiu and Yu (2012), and Berndt and Ostrovnaya (2014) find that the revelation of substantial firm-specific private information in the CDS market occurs primarily for firms with negative news and distress risk. More recently, Lee, Naranjo, and Velioglu (2017) find that CDS returns significantly predict stock returns, and particularly the idiosyncratic component, and find that the jumps in CDS spreads around credit events significantly predict stock returns. Using intraday data, Kryzanowski, Perrakis, and Zhong (2017) document that the CDS market's price-discovery contribution increases significantly for after-hours over-the-counter (OTC) trading and for negative earnings surprises.…”

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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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: 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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“…Eisfeldt et al (2018) document that the CDS market consists of a small number of core dealers and a large number of peripheral customers. It has been documented that the CDS market leads both stock and bond markets in terms of information flow (e.g., Blanco et al, 2005;Acharya and Johnson, 2007;Lee et al, 2018). These findings suggest that CDS dealers are vulnerable to informed trading.…”

Section: Cds Market Structurementioning

confidence: 98%

“…Understanding CDS liquidity is important since it affects CDS prices (Bongaerts et al, 2011;Lee et al, 2016Lee et al, , 2018, the comovement of CDS spreads (Anderson, 2017), CDS-bond basis (Nashikkar et al, 2011), pricing discrepancies across equity and CDS markets (Kapadia and Pu, 2012), equity market quality (Boehmer et al, 2015), corporate capital structures (Saretto and Tookes, 2013), corporate innovation (Chang et al, 2019), and firm value (Narayanan and Uzmanoglu, 2018). Prior studies identify several determinants of CDS liquidity.…”

Section: Literature Review On News Release and Market Liquiditymentioning

confidence: 99%

Public News and Market Liquidity: Evidence from the CDS Market.

Wang¹

2020

Preprint

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This paper examines the effects of public news releases on the market liquidity in one of the most important OTC derivatives markets-the CDS market. We document that, at the time of news releases, the bid-ask spread is wider, the number of quotes is larger, and the number of dealers is greater. Earnings announcements have particularly strong effects on liquidity while news related to credit ratings has no significant effects. Moreover, the bid-ask spread only increases on news release days and reverts to normal levels several days after news releases. Finally, the effect of news on liquidity is stronger for negative, fundamental, and unscheduled news, and is more pronounced among firms with higher information asymmetry. Our findings are consistent with models of rational trade in Kim and Verrecchia (1994).

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“…They also came to the conclusion that positive credit watch and outlook announcements significantly impact CDS markets. More recent studies (Lee et al, 2018) have provided evidence that CDS prices contain unique firm credit risk information that is not captured by the prices of other related securities, such as stocks and bonds tied to the same firm. They argue that CDS returns significantly predict stock returns.…”

Section: Literature Reviewmentioning

confidence: 99%

Sovereign credit ratings and CDS spreads in Emerging Europe

Dopierała

Ilczuk

Wojciechowski

2020

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Research background: Sovereign credit ratings play an important role in determining any country’s access to the international debt market. During the global financial crisis and the European debt crisis, credit rating agencies were harshly criticized for the timing of their announcements regarding ratings downgrades and the ranges of those downgrades. Therefore, it is worth considering whether the sovereign credit rating is still a useful benchmark for investors. Purpose of the article: This article examines whether credit rating agencies still provide financial markets with new information about the solvency of governments in Emerging Europe countries. In addition, it describes the differences in the effect of particular types of rating events on financial markets and the impact of individual agencies on the market situation. Our study also focuses on evaluating these occurrences at different stages of the business cycle. Methods: This article uses data about ratings events that took place between 2008 and 2018 in 17 Emerging Europe economies. We took into consideration positive, neutral, and negative events related to ratings changes and the outlooks reported by Fitch Ratings, Moody’s, and Standard & Poor’s. We used a methodology based on event studies. In addition, we performed Wilcoxon signed-ranks test and used a logit model to determine the usefulness of cumulative adjusted credit default swap (CDS) spread changes in predicting the direction of ratings changes. Findings & Value added: Our research provides evidence that the CDS market reflects information regarding government issuers up to three months before ratings downgrades are announced. Information reported to the market by ratings agencies is only relevant in the short timeframe surrounding ratings downgrades and upgrades. However, positive credit rating changes convey more information to the market. We also found strong evidence that, in the post-crisis period, credit ratings provide markets with less information.

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When do CDS spreads lead? Rating events, private entities, and firm-specific information flows

Cited by 98 publications

References 24 publications

The externalities of credit default swaps on stock return synchronicity

The externalities of credit default swaps on stock return synchronicity

Public News and Market Liquidity: Evidence from the CDS Market.

Sovereign credit ratings and CDS spreads in Emerging Europe

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