When Do CDS Spreads Lead? Rating Events, Private Entities, and Firm-Specific Information Flows

The externalities of credit default swaps on stock return synchronicity

“…Indeed, Acharya and Johnson (), Qiu and Yu (), and Berndt and Ostrovnaya () 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 () 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 () document that the CDS market's price‐discovery contribution increases significantly for after‐hours over‐the‐counter (OTC) trading and for negative earnings surprises.…”

Market Discipline through Credit Ratings and Too‐Big‐to‐Fail in Banking

“…Brennan, and Marsh 2005), that CDS generally reflect new information more quickly than bond markets (e.g., Longstaff, Mithal, and Neis 2005) and also contain unique information not readily present in other markets (Lee, Naranjo, and Velioglu 2018).…”

“…One of the main advantages of CDS is the ease with which to buy credit protection compared to shortening bonds. In addition, prior research documents that information in the CDS market tends to spill over to bond spreads (Blanco, Brennan, and Marsh 2005), that CDS generally reflect new information more quickly than bond markets (e.g., Longstaff, Mithal, and Neis 2005) and also contain unique information not readily present in other markets (Lee, Naranjo, and Velioglu 2018).…”

“…We analyze the reaction of the banks' CDS spreads, which are a direct measure of a bank's creditworthiness and default probability. The CDS market is viewed as one of the most prevalent channels through which new, credit relevant information can be transmitted and which contains unique firm information that is not captured by other markets (Lee, Naranjo, Velioglu 2018). Indeed, given its informed trading (Acharya and Johnson 2007), any deterioration or improvement in a bank's creditworthiness should therefore immediately be reflected in a widening or tightening of the CDS spreads.…”

The Relative Role of Sovereign CDS and Bond Markets in Efficiently Pricing Emerging Market Sovereign Credit Risk

“…Most studies on the dynamic interaction between CDS spread and BS have been conducted on corporate CDS and bonds, where researchers have generally observed that the CDS market is more efficient, including Blanco et al (2005), Longstaff et al (2005), Zhu (2006), Forte and Pena (2009), Li and Huang (2011), Klenina and Mateus (2017), and Lee and Velioglu (2018). However, this finding cannot be generalized to the sCDS market since it differs from the corporate market in several ways.…”