Evolution of the relative efficiency of CDS and equity markets in Japan: Does one market have a long-term informational advantage over the other?

Abstract

Using indices, we comprehensively examine the existence, strength and evolution of cross-market informational flow in the Japanese CDS and equity markets from 2004–2024. We find empirical evidence confirming the existence of such flow in both directions, and that the Japanese CDS market enjoys a significant informational advantage relative to the equity market overall, except during times of great upheaval. However, further analysis reveals that the observed flow is not stable over time, with the early half of the sample accounting for the most pronounced results. We explain this change in flow strength by providing evidence of structural breaks, and identify key factors related to market structure, international trade, market sentiment and health policy which drive such change.