We document a stark asymmetry in price discovery in equity and CDS markets: equity markets robustly lead CDS markets following aggregate and positive news but tend not to do so following other news. While difficult to reconcile with standard asset pricing theories, asymmetric price adjustment is common in goods markets, arising from intermediary power. We provide an explanation for the asymmetry based on dealers exploiting informational advantages vis-à-vis investors with hedging motives. In support of this we find that the equity-lead and its news-specificity are related to firm-level proxies for hedging demand as well as economy-wide measures of information asymmetries.

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Persistent URL hdl.handle.net/1765/115289
Journal Financial Management
Marsh, I.W, & Wagner, W.B. (2015). News‐Specific Price Discovery in Credit Default Swap Markets. Financial Management. Retrieved from http://hdl.handle.net/1765/115289