No, according to this article in the most recent Journal of Fixed Income:

This article investigates volatility transmission among the credit default swap (CDS), equity, and bond markets, using a multivariate GARCH model. The authors hypothesise that volatility in the bond and equity markets can originate from the CDS market where there is potential insider trading and increased trading activity due to private credit information. However, the authors find little evidence to support this. There is evidence for an alternative view that as investors search for yield across different asset classes the links among the CDS, bond, and equity markets strengthen. Volatility in any of the three markets is commonly transmitted to the other two markets.
I can't find an ungated version of the paper. (If you have a copy of the paper, feel free to email it to me; I would be much obliged.) Not good news for Chris Whalen and the other crazy conspiracy theorists.

3 comments:

Anonymous said...

Whether or not these guys (or anyone else) can measure it, there have to be interdependencies between vols in CDS, bond and equity volatility, simply because various investors use all of these underlying instruments in portfolios. If vols of them become disconnected, then at some point, provided there is some risk seeking capital out there, investors will start to do trades so as to address these disconnects. Similar argument could be made for, say, spreads on corporates and CDS levels. There should be some economic relationship there, and if/when it breaks down, people start to put on trades. This appears to be happening these days, after that basis disconnected as all the convert managers liquidated positions. -Mark

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