IDEAS home Printed from https://ideas.repec.org/a/eee/finmar/v55y2021ics1386418120300768.html
   My bibliography  Save this article

Asymmetric information in the equity market and information flow from the equity market to the CDS market

Author

Listed:
  • Park, Heewoo
  • Kim, Tong Suk
  • Park, Yuen Jung

Abstract

We investigate whether asymmetric information in the equity market affects the information flow from the equity market to the credit default swap (CDS) market. We find that the response to stock price changes is larger if they are more informative. Moreover, firms with a lower CDS bid–ask spread are associated with a more rapid response. Our results suggest that asymmetric information in the equity market mainly impacts cross-sectional differences in the total response of the CDS market. Our evidence indicates that this effect is amplified when sentiment-driven trading declines in the equity market or transaction costs are low in the CDS market.

Suggested Citation

  • Park, Heewoo & Kim, Tong Suk & Park, Yuen Jung, 2021. "Asymmetric information in the equity market and information flow from the equity market to the CDS market," Journal of Financial Markets, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:finmar:v:55:y:2021:i:c:s1386418120300768
    DOI: 10.1016/j.finmar.2020.100607
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1386418120300768
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.finmar.2020.100607?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. Kewei Hou & Tobias J. Moskowitz, 2005. "Market Frictions, Price Delay, and the Cross-Section of Expected Returns," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 981-1020.
    2. Yexiao Xu & Burton G. Malkiel, 2003. "Investigating the Behavior of Idiosyncratic Volatility," The Journal of Business, University of Chicago Press, vol. 76(4), pages 613-644, October.
    3. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    4. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    5. Patrick J. Kelly, 2014. "Information Efficiency and Firm-Specific Return Variation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-44.
    6. Miguel A. Ferreira & Paul A. Laux, 2007. "Corporate Governance, Idiosyncratic Risk, and Information Flow," Journal of Finance, American Finance Association, vol. 62(2), pages 951-989, April.
    7. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    8. repec:bla:jfinan:v:59:y:2004:i:1:p:65-105 is not listed on IDEAS
    9. Stambaugh, Robert F. & Yu, Jianfeng & Yuan, Yu, 2012. "The short of it: Investor sentiment and anomalies," Journal of Financial Economics, Elsevier, vol. 104(2), pages 288-302.
    10. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    11. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    12. Acharya, Viral V. & Johnson, Timothy C., 2007. "Insider trading in credit derivatives," Journal of Financial Economics, Elsevier, vol. 84(1), pages 110-141, April.
    13. Dasgupta, Sudipto & Gan, Jie & Gao, Ning, 2010. "Transparency, Price Informativeness, and Stock Return Synchronicity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(5), pages 1189-1220, October.
    14. Rajgopal, Shiva & Venkatachalam, Mohan, 2011. "Financial reporting quality and idiosyncratic return volatility," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 1-20, February.
    15. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    16. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    17. Artyom Durnev & Randall Morck & Bernard Yeung & Paul Zarowin, 2003. "Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 797-836, December.
    18. Lars Norden & Martin Weber, 2009. "The Co†movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis," European Financial Management, European Financial Management Association, vol. 15(3), pages 529-562, June.
    19. Rajgopal, Shiva & Venkatachalam, Mohan, 2011. "Financial reporting quality and idiosyncratic return volatility," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 1-20.
    20. Pontiff, Jeffrey, 2006. "Costly arbitrage and the myth of idiosyncratic risk," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 35-52, October.
    21. Mashruwala, Christina & Rajgopal, Shivaram & Shevlin, Terry, 2006. "Why is the accrual anomaly not arbitraged away? The role of idiosyncratic risk and transaction costs," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 3-33, October.
    22. Tong Suk Kim & Yuen Jung Park & Jaesun Noh, 2013. "The Linkage Between the Options and Credit Default Swap Markets During the Subprime Mortgage Crisis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(6), pages 518-554, June.
    23. Wang, Peipei & Bhar, Ramaprasad, 2014. "Information content in CDS spreads for equity returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 30(C), pages 55-80.
    24. 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.
    25. Chan, Kalok & Hameed, Allaudeen, 2006. "Stock price synchronicity and analyst coverage in emerging markets," Journal of Financial Economics, Elsevier, vol. 80(1), pages 115-147, April.
    26. Michael Lemmon & Evgenia Portniaguina, 2006. "Consumer Confidence and Asset Prices: Some Empirical Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1499-1529.
    27. Han, Bing & Subrahmanyam, Avanidhar & Zhou, Yi, 2017. "The term structure of credit spreads, firm fundamentals, and expected stock returns," Journal of Financial Economics, Elsevier, vol. 124(1), pages 147-171.
    Full references (including those not matched with items on IDEAS)

    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. Zhang, Wei & Li, Xiao & Shen, Dehua & Teglio, Andrea, 2016. "R2 and idiosyncratic volatility: Which captures the firm-specific return variation?," Economic Modelling, Elsevier, vol. 55(C), pages 298-304.
    2. Chue, Timothy K. & Gul, Ferdinand A. & Mian, G. Mujtaba, 2019. "Aggregate investor sentiment and stock return synchronicity," Journal of Banking & Finance, Elsevier, vol. 108(C).
    3. Wei Hao & Andrew Prevost & Udomsak Wongchoti, 2018. "Are Low Equity R2 Firms More or Less Transparent? Evidence from the Corporate Bond Market," Financial Management, Financial Management Association International, vol. 47(4), pages 865-909, December.
    4. Aabo, Tom & Pantzalis, Christos & Park, Jung Chul, 2017. "Idiosyncratic volatility: An indicator of noise trading?," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 136-151.
    5. Beuselinck, C.A.C. & Joos, P.P.M. & Khurana, I.K. & van der Meulen, S., 2010. "Mandatory IFRS Reporting and Stock Price Informativeness," Discussion Paper 2010-82, Tilburg University, Center for Economic Research.
    6. Joachim Gassen & Hollis A. Skaife & David Veenman, 2020. "Illiquidity and the Measurement of Stock Price Synchronicity," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 419-456, March.
    7. Rao, Lanlan & Zhou, Liyun, 2019. "The role of stock price synchronicity on the return-sentiment relation," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 119-131.
    8. Dang, Tung Lam & Moshirian, Fariborz & Zhang, Bohui, 2015. "Commonality in news around the world," Journal of Financial Economics, Elsevier, vol. 116(1), pages 82-110.
    9. Dang, Tung Lam & Dang, Man & Hoang, Luong & Nguyen, Lily & Phan, Hoang Long, 2020. "Media coverage and stock price synchronicity," International Review of Financial Analysis, Elsevier, vol. 67(C).
    10. Sudip Datta & Mai Iskandar‐Datta & Vivek Singh, 2014. "Opaque financial reports and R2: Revisited," Review of Financial Economics, John Wiley & Sons, vol. 23(1), pages 10-17, January.
    11. Nyanine Chuele Fonou-Dombeu & Josue Mbonigaba & Odunayo Magret Olarewaju & Bomi Cyril Nomlala, 2022. "Earnings quality measures and stock return volatility in South Africa," Future Business Journal, Springer, vol. 8(1), pages 1-15, December.
    12. Sila, Vathunyoo & Gonzalez, Angelica & Hagendorff, Jens, 2017. "Independent director reputation incentives and stock price informativeness," Journal of Corporate Finance, Elsevier, vol. 47(C), pages 219-235.
    13. Boubaker, Sabri & Mansali, Hatem & Rjiba, Hatem, 2014. "Large controlling shareholders and stock price synchronicity," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 80-96.
    14. Moonsoo Kang & Kiseok Nam, 2015. "Informed trade and idiosyncratic return variation," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 551-572, April.
    15. Datta, Sudip & Iskandar-Datta, Mai & Singh, Vivek, 2014. "Opaque financial reports and R2: Revisited," Review of Financial Economics, Elsevier, vol. 23(1), pages 10-17.
    16. Li, Xiao & Shen, Dehua & Zhang, Wei, 2018. "Do Chinese internet stock message boards convey firm-specific information?," Pacific-Basin Finance Journal, Elsevier, vol. 49(C), pages 1-14.
    17. Lin, Mei-Chen & Wu, Chu-Hua & Chiang, Ming-Ti, 2014. "Investor attention and information diffusion from analyst coverage," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 235-246.
    18. Xiang Zhang & Han Zhou, 2020. "Leverage structure and stock price synchronicity: Evidence from China," PLOS ONE, Public Library of Science, vol. 15(7), pages 1-15, July.
    19. Kee-Hong Bae & Jin-Mo Kim & Yang Ni, 2013. "Is Firm-specific Return Variation a Measure of Information Efficiency?," International Review of Finance, International Review of Finance Ltd., vol. 13(4), pages 407-445, December.
    20. Michael Firth & Kailong (Philip) Wang & Sonia ML Wong, 2015. "Corporate Transparency and the Impact of Investor Sentiment on Stock Prices," Management Science, INFORMS, vol. 61(7), pages 1630-1647, July.

    More about this item

    Keywords

    Information flow; CDS; Equity; Information environment;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    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:55:y:2021:i:c:s1386418120300768. 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.