Making sense of the mess : do CDS's help?
Date
2010-04
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
ORCID
Type
Degree Level
Masters
Abstract
In a firm level matched sample of 499 firms we examine the information flow between stocks and the credit default swap (CDSs) over a period of January 2004 to December 2008. Our study confirms the general findings of previous studies that the information generally flows from equity market to CDS market. However, for a much smaller number of firms we also find that information also flows from the CDS to its stock. A major advantage of our sample period is that it allows us to examine the information flow before and during the crisis. This paper makes two contributions. We document that the firms for which the information flows from the CDS to its stock increases by almost tenfold during the crisis. The current crisis is often referred as a credit crisis, so this finding is consistent with what is expected of CDSs. The major contribution of this paper is that it identifies the firm specific factors that influence the information flow across the two markets. We show that characteristics such as asset size, profitability, and industry, amongst others, play an important role in determining information flow.
Description
Keywords
credit default swap, CDS, lead-lag, credit crisis, price discovery, firm characteristics
Citation
Degree
Master of Science (M.Sc.)
Department
Finance and Management Science
Program
Finance and Management Science