Game Changer? The Impact of the VW Emission Cheating Scandal on the Co-Integration of Large Automakerss Securities

Abstract

This paper investigates the potential change in the securities market pricing behavior of 16 large, global automakers following disclosure of the Volkswagen emission cheating scandal. The triggering public disclosure occurred on September 18, 2015, when the EPA issued a notice of violation to VW, stating that VW had intentionally circumvented the US clean air rules for diesel car emissions. The EPA notice unleashed a torrent of responses and disclosures by the company, regulators, investigators, stakeholders, and others. We first examine and contend that this event may have unblocked what economists call an informational cascade, in that much of the information on VW diesel car emissions was already known to interested parties, yet no significant market response occurred until the September 18 EPA notice. Second, we predict and find a significant change around this event in the stochastic evolution of equity and credit default swap prices in the automobile industry. In the post-emission-cheating-scandal period, this change is consistent with increased market co-integration. A test of economic significance further supports this finding by showing a decrease in the profitability of a hypothetical arbitrage trading rule based on lead-lag pricing relations in the equity and CDS markets.