Related securities and equity market quality: the case of CDS

Related securities and equity market quality: the case of CDS

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 evi...

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Bibliographic Details
Main Authors: Ekkehart BOEHMER, CHAVA, Sudheer, TOOKES, Heather E.
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2015
Subjects:
CREDIT DEFAULT SWAPS
CORPORATE BOND MARKET
EMPIRICAL-ANALYSIS
STOCK RETURNS
OPTION VOLUME
FINANCIAL INNOVATION
TIME-SERIES
TRANSPARENCY
EFFICIENCY
LIQUIDITY
Finance and Financial Management
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/4978
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Institution: Singapore Management University
Language: English
Description
Summary: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.

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