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.
CITATION STYLE
Marra, M. (2017). Explaining co-movements between equity and CDS bid-ask spreads. Review of Quantitative Finance and Accounting, 49(3), 811–853. https://doi.org/10.1007/s11156-016-0609-6
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