News-Specific Price Discovery in Credit Default Swap Markets

Marsh, I. W. & Wagner, W. (2016). News-Specific Price Discovery in Credit Default Swap Markets. Financial Management, 45(2), pp. 315-340. doi: 10.1111/fima.12095

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Abstract

We examine the lead and lag relation between equity and credit default swap (CDS) markets. We find that price discovery in equity markets only leads CDS markets following aggregate positive news and not so following other news. While difficult to reconcile with standard asset pricing theories, asymmetric price adjustment is common in goods markets, arising from intermediary power. We provide an explanation for this asymmetry based on dealers exploiting informational advantages vis-à-vis investors with hedging motives. Consistent with this explanation, we find that the patterns we document are related to firm-level proxies for hedging demand, as well as economy-wide measures of information asymmetries.

Item Type: Article
Additional Information: This is the peer reviewed version of the following article: Marsh, I. W. and Wagner, W. (2016), News-Specific Price Discovery in Credit Default Swap Markets. Financial Management, 45: 315–340., which has been published in final form at http://dx.doi.org/10.1111/fima.12095. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Subjects: H Social Sciences > HD Industries. Land use. Labor
Divisions: Cass Business School > Faculty of Management
URI: http://openaccess.city.ac.uk/id/eprint/15692

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