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Financial Markets and Portfolio Management

, Volume 29, Issue 4, pp 381–427 | Cite as

The information content of the open interest of credit default swaps

  • Paulo Pereira da SilvaEmail author
Article

Abstract

This article addresses the information content of the open interest of CDS markets. Using a panel database of 481 firms, I show that open interest innovations help to predict subsequent CDS rate changes and stock returns. The open interest dynamics appears to convey specific information on the reference entity and common information. On the one hand, there is evidence that positive open interest growth precedes the announcement of negative earnings surprises, and that high open interest growth prior to these events is linked to positive and significant CDS rate changes. This forecasting power relates with proxies of investors’ attention and market frictions. The predictive power on CDS rates is larger for illiquid contracts and for entities with low credit risk, whereas the predictive power over stock returns is larger for entities that display greater open interest outstanding. On the other hand, this article also shows that the aggregate open interest growth has predictive power on the subsequent returns of CDS and bond main indexes, and to a lesser extent on stock market returns.

Keywords

Credit risk Credit default swap Information flow Informed trading Open interest measures 

JEL Classification

G12 G13 G14 G20 

Notes

Acknowledgments

I am grateful to an anonymous referee, Paulo Horta, Isabel Vieira, and Carlos Vieira for their suggestions and comments on previous drafts. I also thank the editor Markus Schmid for his overall support to the manuscript. I am pleased to acknowledge financial support from Fundação para a Ciência e a Tecnologia and FEDER/COMPETE (grantUID/ECO/04007/2013).

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Copyright information

© Swiss Society for Financial Market Research 2015

Authors and Affiliations

  1. 1.CMVM-Portuguese Securities Market CommissionLisbonPortugal
  2. 2.CEFAGE-UEUniversidade de Évora, Palácio do VimiosoÉvoraPortugal

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