The Credit Default Swap Market and the Settlement of Large Defaults
AbstractThe huge positions on the credit default swaps (CDS) have raised concerns about the ability of the market to settle major entities’ defaults. The near-failure of AIG and the bankruptcy of Lehman Brothers in 2008 have revealed the exposure of CDS’s buyers to counterparty risk and hence highlighted the necessity of organizing the market, which triggered a large reform process. First we analyse the vulnerabilities of the market at the bursting of this crisis. Second, we unravel the auction process implemented to settle defaults, the strategies of buyers and sellers and the links with the bond market. We then study the way it worked for key defaults, such as Lehman Brothers, Washington Mutual, CIT and Thomson, as well as for the Government Sponsored Enterprises, which reveals some oddities in the final prices. Third, we discuss the ongoing reforms aimed at strengthening the market resilience.
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Bibliographic InfoArticle provided by CEPII research center in its journal International Economics/Economie Internationale.
Volume (Year): (2010)
Issue (Month): 123 ()
Credit derivatives; bankruptcy; credit default swap; auction;
Other versions of this item:
- Virginie Coudert & Mathieu Gex, 2010. "The Credit Default Swap Market and the Settlement of Large Defaults," Working Papers 2010-17, CEPII research center.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- G01 - Financial Economics - - General - - - Financial Crises
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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- repec:hum:wpaper:sfb649dp2012-051 is not listed on IDEAS
- Vuillemey, Guillaume & Peltonen, Tuomas A., 2013. "Disentangling the bond-CDS nexus: a stress test model of the CDS market," Working Paper Series 1599, European Central Bank.
- Chernov, Mikhail & Gorbenko, Alexander & Makarov, Igor, 2011.
CEPR Discussion Papers
8456, C.E.P.R. Discussion Papers.
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