Does the CDS market lead the stock market during crises? Evidence from the US, the EU and the UK

Purpose This article tests the lead–lag relationship between the credit default swap (CDS) and the stock markets during the global financial crisis of 2008 and the COVID-19 pandemic for companies across the United States, the European Union and the United Kingdom. Design/methodology/approach The Granger causality test augmented by explanatory variables. Findings The stock market had a strong lead over the CDS market during the 2008 crisis, whereas they were about even during the COVID-19 pandemic. The EU CDS market was the only one to lead the stock market in any sub-period, although the lead was not as strong as the stock market normally had. The lead-lag relationship highlighted a potentially crisis period for the markets, 2016–2017, where the stock market had the weakest lead over the CDS market before the COVID-19 pandemic in the United States and the United Kingdom, while the CDS market took the lead in the European Union. Originality/value This is the first time the lead-lag relationship between the CDS and the stock markets is tested on the same set of companies over an extended period covering both crises (the 2008 crisis and the COVID-19 pandemic) and a period in between. Moreover, articles on the lead–lag relationship are usually focused on companies within one country, whereas this article provides an international comparison.