A PAPER ON CDS & PRICE DISCOVERY

Abstract. This paper examines the dynamics of price discovery among three informationally connected markets: the stock market, the bond market, and the CDS market. The recent financial crisis in the US has provided a perfect natural experiment to study the impact of stress on price discovery. We study daily stock prices, CDS spreads, and bond spreads over a four-year period before and during the crisis (2005-2008) for 10 US financial firms. Before the crisis, the stock market played a dominant role in price discovery. During the crisis, we document a much weaker role of the stock market while the CDS market has taken on a more important role becoming the dominant source of information during the financial crisis.

Christos Giannicos, Hany Guirguis & Michael Suen: “The 2008 Financial Crisis and the Dynamics of Price Discovery Among Stock Prices, CDS Spreads, and Bond Spreads for US Financial Firms”, 2012.

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