Related securities and equity market quality: the case of CDS

Publication Type

Journal Article

Publication Date

6-2015

Abstract

We document that equity markets become less liquid and equity prices become less efficient when markets for single-name credit default swap (CDS) contracts emerge. This finding is robust across a variety of market quality measures. We analyze the potential mechanisms driving this result and find evidence consistent with negative trader-driven information spillovers that result from the introduction of CDS. These spillovers greatly outweigh the potentially positive effects associated with completing markets (e.g., CDS markets increase hedging opportunities) when firms and their equity markets are in "bad" states. In "good" states, we find some evidence that CDS markets can be beneficial.

Keywords

CREDIT DEFAULT SWAPS, CORPORATE BOND MARKET, EMPIRICAL-ANALYSIS, STOCK RETURNS, OPTION VOLUME, FINANCIAL INNOVATION, TIME-SERIES, TRANSPARENCY, EFFICIENCY, LIQUIDITY

Discipline

Finance and Financial Management

Research Areas

Quantitative Finance

Publication

Journal of Financial and Quantitative Analysis

Volume

50

Issue

3

First Page

509

Last Page

541

ISSN

0022-1090

Identifier

10.1017/S0022109015000241

Publisher

Cambridge University Press (CUP): HSS Journals

Additional URL

https://doi.org/10.1017/S0022109015000241

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