Credit Derivatives and Earnings Announcements

The Determinants of CDS Bid-Ask Spreads

“…We consider several specifications to confirm the robustness of this finding. While we analyze CDS bid-ask spreads using a very different methodology compared to the studies of CDS price discovery by Qiu and Yu (2012) and Batta et al (2012), our results are consistent with their finding of endogenous liquidity provision by dealers resulting in greater liquidity prior to CDS premia increases and earnings announcements.…”

“…preceding earnings announcements), which they explain by investor inattention during normal periods. Batta et al (2012) find that price discovery in the CDS market is faster for firms with characteristics associated with abundance of firm-level private information as well as in periods preceding earnings announcements. They also find that CDS liquidity in periods preceding earnings announcements is positively related to several proxies of private information suggesting that informed trading leads to greater liquidity.…”

“…Focusing on earnings announcements is preferable to large price changes because an event defined based on the latter is forward-looking and thus not consistent with standard regression assumptions as pointed out by Hilscher et al (2013). While in our analysis we cannot differentiate between trades driven by information and trades driven by hedging demand or other reasons, following the equity literature we expect bid-ask spreads to reflect the likelihood and severity of possible insider trading, which are arguably strongest ahead of information releases (similar assumption is made by Batta et al, 2012).…”

Are All Credit Default Swap Databases Equal?

“…The dispersion of forecasts should capture the uncertainty among analysts due to their private information. According to Batta et al (2012) the validity of this variable as a proxy of private information in the CDS market hinges on the similarity between the information environments of CDS investors and financial analysts. Thus, the dispersion in the CDS quotes could be due to the fact that the contributors disagree on the credit quality of the underlying firm according to their private information and so, they quote different prices.…”

“…This non-significant effect could be explained by the limitations of equity volatility as a measure of private information. This variable could misidentify private information in the CDS market unless there is a pooling equilibrium in which the same private information is used for trading in both equity and CDS markets, as pointed out by Batta et al (2012).…”