Forecasting high-yield equity and CDS index returns: Does observed cross-market informational flow have predictive power?

We examine the predictive power of cross-market informational flow in the systematic high-yield credit default swap (CDS) and equity markets from 2004 to 2019. Overall, we find both markets useful in forecasting future values of the other, indicating each is more efficient in pricing certain types of information. However, the CDS market has an informational advantage over the high-yield and broader equity market, something not previously documented in the closely related literature, although the advantage and forecasting ability of these markets have decreased with time due to lower volatility. These results have implications for high-yield investors and stakeholders who monitor Markit's CDX North American High-Yield Index for informational content.