Insider Trading in Credit Derivatives

51 Pages Posted: 25 Aug 2005

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Timothy C. Johnson

London Business School; University of Illinois

Multiple version iconThere are 3 versions of this paper

Date Written: August 2005

Abstract

Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) market, consistent with the occurrence of insider trading. We show that the degree of this activity increases with the number of banks that have lending/monitoring relations with a given firm, and that this effect is robust to controls for non-informational trade. Furthermore, consistent with hedging activity by informed banks with loan exposure, information revelation in the CDS market is asymmetric, consisting exclusively of bad news. We find no evidence, however, that the degree of insider activity adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.

Keywords: Adverse selection, default, bank relationship, credit default swaps, asset pricing

JEL Classification: D8, G12, G13, G14, G20

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Johnson, Tim and Johnson, Tim, Insider Trading in Credit Derivatives (August 2005). CEPR Discussion Paper No. 5180, Available at SSRN: https://ssrn.com/abstract=790824

Viral V. Acharya (Contact Author)

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New York University (NYU) - Department of Finance ( email )

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Tim Johnson

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