Abstract
We test the market integration and efficiency of credit default swap (CDS) and equity markets by examining the CDS spreads of 538 US and European firms around unanticipated and sudden credit events (CEs) from 2010 to 2013. We find evidence that stock markets react prior to CDS markets, anticipating CEs to a certain extent. In particular, we find that equity returns during the two days prior to a CE have a highly significant influence on the observed CDS spread change on the day of the CE, indicating that both markets are not fully integrated yet. In addition, we find evidence that CDS spread changes display continuation patterns following positive CEs and reversal patterns following negative CEs. These patterns are in line with the Uncertain Information Hypothesis, suggesting that CDS markets are efficient, albeit lagging equity markets to a certain extent.