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Do Equity Markets Favor Credit Market News Over Options Market News?

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journal contribution
posted on 01.04.2003, 00:00 authored by Antje Berndt, Anastasiya Ostrovnaya
Both credit default swap (CDS) and options markets often experience ab- normal swings prior to the announcement of negative credit news. With the exclusion of negative earnings announcements, we find that options prices reveal information about such forthcoming adverse events at least as early as do credit spreads. Prior to negative credit news being publicly disclosed, we find that the equity market does not respond to abnormal movement in options prices unless that information has also manifested itself in the CDS market. A potential explanation is that options are more likely to trade on unsubstantiated rumors than are default swaps.

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01/04/2003