How do corporate factors affect price discovery process between equity and credit markets?

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Zhou, Xinquan and Bagnarosa, Guillaume and Cummins, Mark (2025) How do corporate factors affect price discovery process between equity and credit markets? Accounting and Finance. ISSN 0810-5391 (https://doi.org/10.1111/acfi.70116)

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Abstract

We conduct price discovery analysis to investigate the lead–lag relationship between equity and CDS markets within a corporate finance framework. Based on a sample of 89 firms covering investment-grade and high-yield firms, we detect stationarity and cointegration within a panel framework associated with nine corporate financial characteristic factors. With an expectation maximisation Kalman filter applied to deal with non-synchronicity and microstructure noise in 1-min data, we verify its practicability in addressing the issue of missing data in a high-frequency modelling setting. We demonstrate that the price discovery process is more credit market driven when a company's credit risk increases, which is significantly more prominent for small-sized firms with highly volatile equity prices and increasing default probability.

ORCID iDs

Zhou, Xinquan, Bagnarosa, Guillaume and Cummins, Mark ORCID logoORCID: https://orcid.org/0000-0002-3539-8843;
CORE (COnnecting REpositories)