Time-Varying Credit Risk Discovery in the Stock and CDS Markets: Evidence from Quiet and Crisis Times


  • We acknowledge financial support from Fundación UCEIF and Banco Santander; Banco Sabadell (Santiago Forte); and Ministerio de Asuntos Exteriores y de Cooperación, y Agencia Española de Cooperación Internacional (MAEC-AECID) (Lidija Lovreta). We also thank Viral Acharya, Carmen Ansotegui, Mascia Bedendo, Vivien Brunel, John Doukas, Ariadna Dumitrescu, Sergio Mayordomo, Zorica Mladenović, José Olmo, Pavle Petrović, Antonio Rubia, Giovanni Urga and an anonymous referee for their helpful suggestions. The usual disclaimers apply. Correspondence: Lidija Lovreta.


We analyse the dynamic relationship between the stock and the CDS market during the period 2002–2008. We document that the stock market's informational dominance reported in previous studies holds only in times of financial crisis. During tranquil times, the CDS market's contribution to price discovery is equal or higher than that of the stock market. Moreover, the credit risk level of the company has a positive effect on the information share of its stocks beyond the effect of the overall state of the economy. We show that these conclusions do not contradict the argument of insider trading in credit derivatives.