Explaining co-movements between equity and CDS bid-ask spreads |
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Authors: | Miriam Marra |
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Institution: | 1.ICMA Centre, Henley Business School,University of Reading,Reading,UK |
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Abstract: | In this paper I show that the co-movements between bid-ask spreads of equities and credit default swaps vary over time and increase over crisis periods. The co-movements are strongly related to systematic risk factors and to the theoretical debt-to-equity hedge ratio. I document that hedging and asymmetric information, besides higher funding costs and market volatility risk, are driving factors of the commonality and are significantly priced in CDS bid-ask spreads. |
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