IDEAS home Printed from https://ideas.repec.org/a/eee/finmar/v43y2019icp96-120.html
   My bibliography  Save this article

Excess comovement in credit default swap markets: Evidence from the CDX indices

Author

Listed:
  • Cathcart, Lara
  • El-Jahel, Lina
  • Evans, Leo
  • Shi, Yining

Abstract

We provide evidence of excess comovement in the credit default swap (CDS) market following inclusions to and exclusions from investment grade and high yield CDX indices during the 2003–2016 period. We find that when a name joins an index, its return tends to covary more with the returns of that index and conversely when it is excluded from an index, its return tends to covary less with it. We use univariate regressions and a difference-in-difference approach to show that the CDS market is impacted by indexation. This excess comovement indicates a departure from fundamental-based pricing and provides support in favour of style investing.

Suggested Citation

  • Cathcart, Lara & El-Jahel, Lina & Evans, Leo & Shi, Yining, 2019. "Excess comovement in credit default swap markets: Evidence from the CDX indices," Journal of Financial Markets, Elsevier, vol. 43(C), pages 96-120.
    • Handle: RePEc:eee:finmar:v:43:y:2019:i:c:p:96-120
    DOI: 10.1016/j.finmar.2018.10.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1386418118300156
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.finmar.2018.10.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:bla:jfinan:v:59:y:2004:i:4:p:1677-1716 is not listed on IDEAS
    2. Sergio Mayordomo & Juan Ignacio Peña & Eduardo S. Schwartz, 2014. "Are All Credit Default Swap Databases Equal?," European Financial Management, European Financial Management Association, vol. 20(4), pages 677-713, September.
    3. Cao, Charles & Yu, Fan & Zhong, Zhaodong, 2010. "The information content of option-implied volatility for credit default swap valuation," Journal of Financial Markets, Elsevier, vol. 13(3), pages 321-343, August.
    4. Raffestin, Louis, 2017. "Do bond credit ratings lead to excess comovement?," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 41-55.
    5. Jorion, Philippe & Zhang, Gaiyan, 2007. "Good and bad credit contagion: Evidence from credit default swaps," Journal of Financial Economics, Elsevier, vol. 84(3), pages 860-883, June.
    6. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
    7. Hilscher, Jens & Pollet, Joshua M. & Wilson, Mungo, 2015. "Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(3), pages 543-567, June.
    8. Wahal, Sunil & Yavuz, M. Deniz, 2013. "Style investing, comovement and return predictability," Journal of Financial Economics, Elsevier, vol. 107(1), pages 136-154.
    9. Suleyman Basak & Anna Pavlova, 2013. "Asset Prices and Institutional Investors," American Economic Review, American Economic Association, vol. 103(5), pages 1728-1758, August.
    10. Haibin Zhu, 2006. "An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 29(3), pages 211-235, June.
    11. Froot, Kenneth A. & Dabora, Emil M., 1999. "How are stock prices affected by the location of trade?," Journal of Financial Economics, Elsevier, vol. 53(2), pages 189-216, August.
    12. Robin Greenwood, 2008. "Excess Comovement of Stock Returns: Evidence from Cross-Sectional Variation in Nikkei 225 Weights," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1153-1186, May.
    13. Brian H. Boyer, 2011. "Style‐Related Comovement: Fundamentals or Labels?," Journal of Finance, American Finance Association, vol. 66(1), pages 307-332, February.
    14. Chen, Honghui & Singal, Vijay & Whitelaw, Robert F., 2016. "Comovement revisited," Journal of Financial Economics, Elsevier, vol. 121(3), pages 624-644.
    15. Chen, Hsiu-Lang & De Bondt, Werner, 2004. "Style momentum within the S&P-500 index," Journal of Empirical Finance, Elsevier, vol. 11(4), pages 483-507, September.
    16. Vijh, Anand M, 1994. "S&P 500 Trading Strategies and Stock Betas," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 215-251.
    17. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
    18. Marian Micu & Eli M Remolona & Philip D. Wooldridge, 2006. "The price impact of rating announcements: which announcements matter?," BIS Working Papers 207, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hsien-Yi Chen & Sheng-Syan Chen, 2023. "Can credit default swaps exert an enduring monitoring influence on political integrity?," Review of Quantitative Finance and Accounting, Springer, vol. 60(2), pages 445-469, February.
    2. Do, Hung X. & Nguyen, Nhut H. & Nguyen, Quan M.P., 2022. "Multinationals and stock return comovement," Global Finance Journal, Elsevier, vol. 52(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xinyuan Tao & Chunchi Wu, 2021. "Rating labels and style investing: Evidence from Moody's rating recalibration," Financial Management, Financial Management Association International, vol. 50(4), pages 1047-1084, December.
    2. Ashour, Samar & Hao, Grace Qing & Harper, Adam, 2023. "Investor sentiment, style investing, and momentum," Journal of Financial Markets, Elsevier, vol. 62(C).
    3. Louis RAFFESTIN, 2016. "Do bond credit ratings lead to excess comovement," LEO Working Papers / DR LEO 2481, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    4. Grégoire, Vincent, 2020. "The rise of passive investing and index-linked comovement," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    5. Chen, Honghui & Singal, Vijay & Whitelaw, Robert F., 2016. "Comovement revisited," Journal of Financial Economics, Elsevier, vol. 121(3), pages 624-644.
    6. Do, Hung X. & Nguyen, Nhut H. & Nguyen, Quan M.P., 2022. "Multinationals and stock return comovement," Global Finance Journal, Elsevier, vol. 52(C).
    7. Kaul, Aditya & Mehrotra, Vikas & Stefanescu, Carmen, 2016. "Location and excess comovement," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 293-308.
    8. Staer, Arsenio & Sottile, Pedro, 2018. "Equivalent volume and comovement," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 143-157.
    9. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    10. Raffestin, Louis, 2017. "Do bond credit ratings lead to excess comovement?," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 41-55.
    11. Liao, Yixin & Coakley, Jerry & Kellard, Neil, 2022. "Index tracking and beta arbitrage effects in comovement," International Review of Financial Analysis, Elsevier, vol. 83(C).
    12. Ashish Agarwal & Alvin Chung Man Leung & Prabhudev Konana & Alok Kumar, 2017. "Cosearch Attention and Stock Return Predictability in Supply Chains," Information Systems Research, INFORMS, vol. 28(2), pages 265-288, June.
    13. Alvin Chung Man Leung & Ashish Agarwal & Prabhudev Konana & Alok Kumar, 2017. "Network Analysis of Search Dynamics: The Case of Stock Habitats," Management Science, INFORMS, vol. 63(8), pages 2667-2687, August.
    14. repec:ibf:ijbfre:v:11:y:2017:i:2:p:39-56 is not listed on IDEAS
    15. Do, Hung X. & Nguyen, Lily & Nguyen, Nhut H. & Nguyen, Quan M.P., 2022. "LGBT policy, investor trading behavior, and return comovement," Journal of Economic Behavior & Organization, Elsevier, vol. 196(C), pages 457-483.
    16. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.
    17. Galvani, Valentina, 2022. "Country-Based Investing with Exchange Rate and Reserve Currency," Working Papers 2022-5, University of Alberta, Department of Economics.
    18. Jame, Russell & Tong, Qing, 2014. "Industry-based style investing," Journal of Financial Markets, Elsevier, vol. 19(C), pages 110-130.
    19. Prashant Das & Julia Freybote & Gianluca Marcato, 2015. "An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market," The Journal of Real Estate Finance and Economics, Springer, vol. 51(2), pages 160-189, August.
    20. Ka Kei Chan & Ming‐Tsung Lin & Qinye Lu, 2024. "Corporate credit default swap systematic factors," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(7), pages 1224-1256, July.
    21. Hsu, Ching-Chi & Chen, Miao-Ling, 2019. "Asymmetric effect of style comovement on momentum," Finance Research Letters, Elsevier, vol. 31(C), pages 146-154.

    More about this item

    Keywords

    Credit default swaps; Excess comovement; CDX indices; Credit ratings;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finmar:v:43:y:2019:i:c:p:96-120. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/finmar .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.