Skip to main content Accessibility help

Related Securities and Equity Market Quality: The Case of CDS

  • Ekkehart Boehmer (a1), Sudheer Chava (a2) and Heather E. Tookes (a3)


We document that equity markets become less liquid and equity prices become less efficient when markets for single-name credit default swap (CDS) contracts emerge. This finding is robust across a variety of market quality measures. We analyze the potential mechanisms driving this result and find evidence consistent with negative trader-driven information spillovers that result from the introduction of CDS. These spillovers greatly outweigh the potentially positive effects associated with completing markets (e.g., CDS markets increase hedging opportunities) when firms and their equity markets are in “bad” states. In “good” states, we find some evidence that CDS markets can be beneficial.


Corresponding author

*Corresponding author:


Hide All
Acharya, V. V., and Johnson, T.. “Insider Trading in Credit Derivatives.” Journal of Financial Economics, 84 (2007), 110141.
Acharya, V. V., and Johnson, T.. “More Insiders, More Insider Trading: Evidence from Private Equity Buyouts.” Journal of Financial Economics, 98 (2010), 500523.
Altman, E. “Financial Ratios, Discriminant Analysis, and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589609.
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 3156.
Amihud, Y.; Lauterbach, B.; and Mendelson, H.. “The Value of Trading Consolidation: Evidence from the Exercise of Warrants.” Journal of Financial and Quantitative Analysis, 38 (2003), 829846.
Ashcraft, A., and Santos, J.. “Has the CDS Market Lowered the Cost of Corporate Debt?” Journal of Monetary Economics, 56 (2009), 514523.
Asquith, P.; Au, A.; Covert, T.; and Pathak, P.. “The Market for Borrowing Corporate Bonds.” Journal of Financial Economics, 107 (2013), 155182.
Berndt, A., and Ostrovnaya, A.. “Information Flow between Credit Default Swap, Option and Equity Markets.” Working Paper, Carnegie Mellon University (2007).
Bessembinder, H. “Issues in Assessing Trade Execution Costs.” Journal of Financial Markets, 6 (2003), 233257.
Bessembinder, H., and Maxwell, W.. “Market Transparency and the Corporate Bond Market.” Journal of Economic Perspectives, 22 (2008), 217234.
Bessembinder, H.; Maxwell, W.; and Venkataraman, K.. “Market Transparency, Liquidity Externalities, and Institutional Trading Costs in Corporate Bonds.” Journal of Financial Economics, 82 (2006), 251288.
Beveridge, S., and Nelson, C. R.. “A New Approach to Decomposition of Economic Time Series into Permanent and Transitory Components with Particular Attention to Measurement of the ‘Business Cycle’.” Journal of Monetary Economics, 7 (1981), 151174.
Bhattacharya, U.; Reny, P. J.; and Spiegel, M.. “Destructive Interference in an Imperfectly Competitive Multi-Security Market.” Journal of Economic Theory, 65 (1995), 136170.
Biais, B., and Hillion, P.. “Insider and Liquidity Trading in Stock and Options Markets.” Review of Financial Studies, 7 (1994), 743780.
Blanco, R.; Brennan, S.; and Marsh, I.. “An Empirical Analysis of the Dynamic Relationship between Investment-Grade Bonds and Credit Default Swaps.” Journal of Finance, 60 (2005), 22552281.
Boehmer, E.; Jones, C.; and Zhang, X.. “Which Shorts Are Informed?” Journal of Finance, 63 (2008), 491527.
Boehmer, E., and Kelley, E. K.. “Institutional Investors and the Informational Efficiency of Prices.” Review of Financial Studies, 22 (2009), 35633594.
Cao, C. Q.; Chen, Z.; and Griffin, J. M.. “The Information Content of Option Volume Prior to Takeovers.” Journal of Business, 78 (2005), 10731109.
Chan, K.; Chung, P. Y.; and Fong, W.. “The Informational Role of Stock and Option Volume.” Review of Financial Studies, 15 (2002), 19491975.
Chava, S.; Ganduri, R.; and Orthanalai, C.. “Are Credit Ratings Still Relevant?” Working Paper, Georgia Institute of Technology (2012).
Chava, S., and Purnanandam, A.. “The Effect of Banking Crisis on Bank-Dependent Borrowers.” Journal of Financial Economics, 99 (2011), 116135.
Choi, D.; Getmansky, M.; and Tookes, H.. “Convertible Bond Arbitrage, Liquidity Externalities, and Stock Prices.” Journal of Financial Economics, 91 (2009), 227251.
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Evidence on the Speed of Convergence to Market Efficiency.” Journal of Financial Economics, 76 (2005), 271292.
Das, S.; Hanouna, P.; and Sarin, A.. “Accounting-Based versus Market-Based Cross-Sectional Models of CDS Spreads.” Journal of Banking and Finance, 33 (2009), 719730.
Das, S.; Kalimipalli, M.; and Nayak, S.. “Did CDS Trading Improve the Market for Corporate Bonds?” Journal of Financial Economics, 111 (2014), 495525.
Detemple, J., and Jorion, P.. “Option Listing and Stock Returns: An Empirical Analysis.” Journal of Banking and Finance, 14 (1990), 781801.
Dow, J. “Arbitrage, Hedging and Financial Innovation.” Review of Financial Studies, 11 (1998), 739755.
Easley, D.; O’Hara, M.; and Srinivas, P. S.. “Option Volume and Stock Prices: Evidence on Where Informed Traders Trade.” Journal of Finance, 53 (1998), 431465.
Edwards, A.; Harris, L.; and Piwowar, M.. “Corporate Bond Market Transaction Costs and Transparency.” Journal of Finance, 62 (2007), 14211451.
Elul, R. “Welfare Effects of Financial Innovation in Incomplete Markets with Several Consumption Goods.” Journal of Economic Theory, 65 (1995), 4378.
Goldstein, I.; Li, Y.; and Yang, L.. “Speculation and Hedging in Segmented Markets.” Review of Financial Studies, 27 (2014), 881922.
Goldstein, M.; Hotchkiss, E.; and Sirri, E.. “Transparency and Liquidity: A Controlled Experiment on Corporate Bonds.” Review of Financial Studies, 20 (2007), 235273.
Gorton, G. N., and Pennacchi, G. G.. “Security Baskets and Index-Linked Securities.” Journal of Business, 66 (1993), 127.
Goyenko, R. Y.; Holden, C. W.; and Trzcinka, C. A.. “Do Liquidity Measures Measure Liquidity?” Journal of Financial Economics, 92 (2009), 153181.
Hand, J. R. M.; Holthausen, R. W.; and Leftwich, R. W.. “The Effect of Bond Rating Agency Announcements on Bond and Stock Prices.” Journal of Finance, 47 (1992), 733752.
Hasbrouck, J. “Assessing the Quality of a Security Market: A New Approach to Transaction Cost Measurement.” Review of Financial Studies, 6 (1993), 191212.
Hasbrouck, J. “Order Characteristics and Stock Price Evolution: An Application to Program Trading.” Journal of Financial Economics, 41 (1996), 129149.
Kaniel, R.; Saar, G.; and Titman, S.. “Individual Investor Trading and Stock Returns.” Journal of Finance, 63 (2007), 273309.
Kumar, R.; Sarin, A.; and Shastri, K.. “The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis.” Journal of Finance, 53 (1998), 717732.
Lee, C., and Ready, M.. “Inferring Trade Direction from Intraday Data.” Journal of Finance, 46 (1991), 733746.
Madhavan, A. “Market Microstructure: A Survey.” Journal of Financial Markets, 3 (2000), 205258.
Mayhew, S. “The Impact of Derivatives on Cash Markets: What Have We Learned?” Working Paper, University of Georgia (2000).
Mayhew, S., and Mihov, V.. “How Do Exchanges Select Stocks for Option Listing?” Journal of Finance, 59 (2004), 447471.
Mayordomo, S.; Peña, J. I.; and Schwartz, E. S.. “Are All Credit Default Swap Databases Equal?” European Financial Management, 20 (2014), 677713.
Merton, R. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance, 29 (1974), 449470.
Muravyev, D.; Pearson, N.; and Broussard, J. P.. “Is There Price Discovery in Equity Options?” Journal of Financial Economics, 107 (2013), 259283.
Norden, L., and Weber, M.. “The Co-Movement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis.” European Financial Management, 15 (2009), 529562.
Oehmke, M., and Zawadowski, A.. “The Anatomy of the CDS Market.” Working Paper, Columbia University (2012).
O’Hara, M. Market Microstructure Theory. Oxford: Blackwell Publishers (1995).
O’Hara, M., and Ye, M.. “Is Market Fragmentation Harming Market Quality?” Journal of Financial Economics, 100 (2011), 459474.
Pan, J., and Poteshman, A.. “The Information in Option Volume for Future Stock Prices.” Review of Financial Studies, 19 (2006), 871908.
Roberts, M., and Whited, T.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. 2, Constantinides, G., Harris, M., and Stulz, R., eds. Oxford, UK: Elsevier (2012).
Rosenbaum, P. R., and Rubin, D. B.. “The Central Role of the Propensity Score in Observational Studies for Causal Effects.” Biometrika, 70 (1983), 4155.
Ross, S. A. “Options and Efficiency.” Quarterly Journal of Economics, 90 (1976), 7589.
Saretto, A., and Tookes, H.. “Corporate Leverage, Debt Maturity and Credit Supply: The Role of Credit Default Swaps.” Review of Financial Studies, 26 (2013), 11901247.
Shea, J. “Instrument Relevance in Multivariate Linear Models: A Simple Measure.” Review of Economics and Statistics, 49 (1997), 348352.
Stock, J. H., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” In Identification and Inference for Econometric Models: Essays in Honor of Thomas J. Rothenberg, Stock, J. H. and Andrews, D. W. K., eds. New York, NY: Cambridge University Press (2005), 80108.
Stulz, R. “Credit Default Swaps and the Credit Crisis.” Journal of Economic Perspectives, 24 (2010), 7392.
Subrahmanyam, A. “A Theory of Trading in Stock Index Futures.” Review of Financial Studies, 4 (1991), 1751.
Subrahmanyam, M.; Tang, D. Y.; and Wang, S. Q.. “Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk.” Review of Financial Studies, 27 (2014), 29272960.

Related content

Powered by UNSILO

Related Securities and Equity Market Quality: The Case of CDS

  • Ekkehart Boehmer (a1), Sudheer Chava (a2) and Heather E. Tookes (a3)


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed.