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Related Securities and Equity Market Quality: The Case of CDS

Published online by Cambridge University Press:  06 August 2015

Ekkehart Boehmer ,
Sudheer Chava  and
Heather E. Tookes
Ekkehart Boehmer
Affiliation:
eboehmer@smu.edu.sg, Singapore Management University, Lee Kong Chian School of Business, Singapore 178899, Singapore
Sudheer Chava
Affiliation:
sudheer.chava@scheller.gatech.edu, Georgia Institute of Technology, Scheller College of Business, Atlanta, GA 30308
Heather E. Tookes*
Affiliation:
heather.tookes@yale.edu, Yale School of Management, New Haven, CT 06520.
*
*Corresponding author: heather.tookes@yale.edu
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 509 - 541
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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