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Purpose: In this paper I investigate the information flow between the credit default swap market and the stock market as well as insider trading in the credit default swap market.
Methodology: For my analysis I use the event study methodology. Using the event study methodology I calculate abnormal stock returns and abnormal credit default swap premium changes. The analysis is based on 175,874 observations collected for 92 companies between the years 2001 and 2010.
Findings: The results show that the information flow from the credit default swap market to the stock market is the most significant in terms of negative rating outlooks. The information flow is much less significant in relations to negative surprises during announcements of annual financial results and rating upgrades. Evidence of insider trading is also most evident with reference to negative rating outlooks. Additionally, a distinctive feature of the credit default swap market and the stock market is the asymmetric response to negative and positive credit information.
Research limitations: The event study methodology does not consider other potentially important reasons for the information flow between markets than the ones actually investigated. The credit events and credit risk information used in this research are just a proposal and can be extended by future researchers.
Originality: This paper discusses a new research area. The main research area in terms of insider trading is still the stock market, with special focus on the US market. I decided to explore the insider trading phenomenon in the credit default swap market. I only considered contracts that are quoted with reference to European underlying assets. This part of the financial market is attractive in terms of economic research as credit derivatives are more commonly used not only in North America but also in Europe. (original abstract)
Methodology: For my analysis I use the event study methodology. Using the event study methodology I calculate abnormal stock returns and abnormal credit default swap premium changes. The analysis is based on 175,874 observations collected for 92 companies between the years 2001 and 2010.
Findings: The results show that the information flow from the credit default swap market to the stock market is the most significant in terms of negative rating outlooks. The information flow is much less significant in relations to negative surprises during announcements of annual financial results and rating upgrades. Evidence of insider trading is also most evident with reference to negative rating outlooks. Additionally, a distinctive feature of the credit default swap market and the stock market is the asymmetric response to negative and positive credit information.
Research limitations: The event study methodology does not consider other potentially important reasons for the information flow between markets than the ones actually investigated. The credit events and credit risk information used in this research are just a proposal and can be extended by future researchers.
Originality: This paper discusses a new research area. The main research area in terms of insider trading is still the stock market, with special focus on the US market. I decided to explore the insider trading phenomenon in the credit default swap market. I only considered contracts that are quoted with reference to European underlying assets. This part of the financial market is attractive in terms of economic research as credit derivatives are more commonly used not only in North America but also in Europe. (original abstract)
Rocznik
Tom
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25--54
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autor
Bibliografia
- Alexakis, C.A., Kolomitsini, M.C. and Xanthakis, M. (2008). Empirical Tests on the Stock Price Behaviour of Privatized Enterprises in Greece. Journal of Money, Investment and Banking, 6: 9-11.
- Avgouleas, E. (2005). The Mechanics and Regulation of Market Abuse. Oxford: Oxford University Press, DOI: 10.1093/acprof:oso/9780199244522.001.0001.
- Daniels, K.N. and Jensen, M.S. (2005). The effect of credit ratings on credit default swap spreads and credit spreads. The Journal of Fixed Income: 25-27, DOI: 10.3905/jfi.2005.605421.
- Datta, S. and Iskandar-Datta, M.E. (1996). Does insider trading have information content for the bond market?, Journal of Banking & Finance: 560-562, DOI: 10.1016/0378-4266(95)00005-4.
- Del Brio, E.B., Miguel, A. and Perote, J. (2002). An investigation of insider trading profits in the Spanish stock market. The Quarterly Review of Economics and Finance: 80-81. DOI: 10.1016/S1062-9769(01)00103-X.
- Etebari, A., Tourani-Rad, A. and Gilbert, A. (2004). Disclosure regulation and the profitability of insider trading: Evidence from New Zealand. Pacific-Basin Finance Journal: 490-491, 500, DOI: 10.1016/j.pacfin.2003.09.005.
- Hull, J., Predescu, M. and White, A. (2004). The relationship between credit default swap spreads, bond yields, and credit rating announcements. Journal of Banking & Finance: 2800-2804, DOI: 10.1016/j.jbankfin.2004.06.010
- Jackowicz, K. (2001a). Pochodne instrumenty kredytowe (I). Definicja i rodzaje pochodnych instrumentów kredytowych. Bank i Kredyt, 33(3): 51-63.
- Jackowicz, K. (2001b). Pochodne instrumenty kredytowe (II). Zastosowanie pochodnych instrumentów kredytowych i związane z tym problem. Bank i Kredyt, 33(4): 33-45.
- Jeng, L.A., Metrick, A. and Zeckhauser, R. (1999). The profits to insider trading: a performance-evaluation perspective. NBER Working Paper Series, Working Paper 6913: 8.
- Korczak, A., Korczak, P. and Traczykowski, J. (2012). Profitability of insider trading in Europe: a performance evaluation approach. Available at: http://ssrn.com/abstract=2117121.
- Kowalewski, O. (2006). Wartość dla akcjonariuszy mniejszościowych w procesie wycofywania spółek z obrotu giełdowego. Bank i Kredyt: 78.
- Lakonishok, J. and Lee, I. (1998). Are insiders' trades informative? National Bureau of Economic Research: 4-5.
- Machan, T.R. (1996). What is Morally Right With Insider Trading? Public Affairs Quarterly, 10: 135-142.
- MacKinlay, A.C. (1997). Event Studies In Economics and Finance, Journal of Economic Literature, XXXV.
- Massa, M. and Schmidt, D.(2012). Insider trading in the bond market: evidence from loan sale events. Available at: www.phd.insead.edu.
- Micu, M., Remolona, E. and Wooldridge, P. (1996). The price impact of rating announcements: which announcements matter?, Bank for International Settlements, BIS Working Papers No. 207: 11-13.
- Norden, L. and Weber, M. (2004). Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements. Journal of Banking and Finance: 2823-2831, DOI: 10.1016/j.jbankfin.2004.06.011
- Olmo, J., Pilbeam, K. and Pouliot W.(2011), Detecting the presence of insider trading via structural break test, Journal of Banking & Finance: 2820-2828. Available at: http://dx.doi.org/10.1016/j.jbankfin.2011.03.013.
- Serra, A.P. (2002). Event Study Tests. A brief survey, Working Papers da FEP, Universidade do Porto, Faculdade de Economia.
- Skaife H.A., Veenman D. and Wangerin D. (2013). Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading, Journal of Accounting and Economics: 91-110.
- Wiśniewski, T.P. (2004). Reexamination of the link between insider trading and price efficiency, Economic Systems: 221-222 i 224-227, DOI: 10.1016/j.ecosys.2004.06.003.
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