The stock price effect of the introduction of exchange-traded credit derivatives

• Autores: Lisa A. Schwartz, Kristin Stowe, Wayne Tarrant
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 23, Nº. 19-21, 2013, págs. 1531-1539
• Idioma: inglés
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• Resumen

  • This research investigates the stock market reaction to the February 2011 announcement of a new financial product: credit event binary options (CEBOs). The CEBOs could be an alternative to credit default swaps for hedging or speculating on default. These credit options, traded on the Chicago Board Options Exchange (CBOE), pay-off only in the event of default by the underlying firm. Options were initially introduced for 10 firms from various sectors of the economy. In April 2011, additional CEBOs were introduced for five large banks. This study finds that the announcement of the binary options did not have a significant negative effect on the stock prices of the underlying firms. These firms did have a significant negative cumulative abnormal return over the entire event window surrounding option announcement. Analysis of trading volume finds that the majority of the CEBOs did not trade at all during the first 110 days after listing. Results indicate that market participants are not utilizing exchange-traded credit options for hedging credit exposure or speculating on credit default.