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Cross-market informed trading in the CDS and option markets
Global Finance Journal ( IF 2.853 ) Pub Date : 2021-05-21 , DOI: 10.1016/j.gfj.2021.100646
May Hu , Jason Park , Jane Chen , Peter Verhoevenc

This paper analyzes how informed traders balance leverage and liquidity in making cross-market trading decisions. Our findings are three-fold. Using daily data on the actively traded North American CDX Investment Grade and High Yield indexes from 2010 to 2017, first, we find robust evidence that, when the credit default swap (CDS) market is illiquid, informed traders do not hesitate to exploit their information advantage in the option market, and this manifests mainly for negative credit news. Second, we find that informed trading occurs predominantly in the option market for low-rated firms due to high adverse selection risk in the CDS market. Third, there is strong evidence of informed trading taking place in the CDS market for financial firms and we argue that this is due to the interdealer network through which CDS dealers obtain private information about other financial firms and their privileged position as market makers to be able to disguise their informed trades as ordinary market-making activities. Finally, we propose re-thinking market efficiency and how to advance it in a direction which does not privilege a small circle of financiers or create monopoly while keeping the markets liquid and tranquil at all times.



中文翻译:

CDS 和期权市场的跨市场知情交易

本文分析了知情交易者在做出跨市场交易决策时如何平衡杠杆和流动性。我们的发现是三方面的。使用 2010 年至 2017 年交易活跃的北美 CDX 投资级和高收益指数的每日数据,我们首先发现强有力的证据表明,当信用违约掉期 (CDS) 市场缺乏流动性时,知情交易者会毫不犹豫地利用他们的信息期权市场的优势,这主要体现在负面信用消息上。其次,我们发现,由于 CDS 市场的高逆向选择风险,知情交易主要发生在低评级公司的期权市场。第三,有强有力的证据表明金融公司在 CDS 市场上进行了知情交易,我们认为这是由于 CDS 交易商通过该网络获取有关其他金融公司的私人信息及其作为做市商的特权地位能够伪装他们的知情交易作为普通的做市活动。最后,我们建议重新思考市场效率,以及如何在不让一小部分金融家享有特权或造成垄断的方向上推进它,同时始终保持市场流动性和平静。

更新日期:2021-05-21
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