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The Relative Informational Efficiency of Stocks, Options and Credit Default Swaps

Author

Listed:
  • Lamia Bekkour

    (Luxembourg School of Finance, University of Luxembourg)

  • Thorsten Lehnert

    (Luxembourg School of Finance, University of Luxembourg)

  • Maria Chiara Amadari

    (School of Business and Economics, Maastricht University)

Abstract

In this study, we investigate the dynamics behind informed investors’ trading decisions among European stock, options and credit default swap markets. This allows us to identify the predictive explanatory power of the unique information contained in each market with respect to future stock, CDS and option market movements. A lead-lag relation is found between the options and CDS market in which changes in equity options’ implied volatility are able to consistently forecast changes in CDS spreads pointing out how the option market seems to play a special role in the price discovery process even in the presence of a very fast growing competitive market like the CDS market. Moreover, in contrast to US results, the stock market is found to forecast changes in the other two markets suggesting that investors first prefer stock market involvement to exploit their information advantages and then move to CDS and option markets. Although this is the case, the CDS market seems to gain importance in the price discovery process as firms’ become more risky.

Suggested Citation

  • Lamia Bekkour & Thorsten Lehnert & Maria Chiara Amadari, 2011. "The Relative Informational Efficiency of Stocks, Options and Credit Default Swaps," LSF Research Working Paper Series 11-04, Luxembourg School of Finance, University of Luxembourg.
    • Handle: RePEc:crf:wpaper:11-04
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Credit default swap spread; option-implied volatility; lead-lag relationship; price discovery; informed trading.;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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