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Explaining co-movements between equity and CDS bid-ask spreads

Marra, M. (2017) Explaining co-movements between equity and CDS bid-ask spreads. Review of Quantitative Finance and Accounting, 49 (3). pp. 811-853. ISSN 1573-7179

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To link to this item DOI: 10.1007/s11156-016-0609-6


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.

Item Type:Article
Divisions:Henley Business School > ICMA Centre
ID Code:67479
Uncontrolled Keywords:Credit Default Swap, Bid-Ask Spread Co-movement, Funding Costs, Systematic Risk, Hedging, Capital Structure Arbitrage


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