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Credit default swap auctions

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Author Info

  • Jean Helwege
  • Samuel Maurer
  • Asani Sarkar
  • Yuan Wang

Abstract

The rapid growth of the credit default swap (CDS) market and the increased number of defaults in recent years have led to major changes in the way CDS contracts are settled when default occurs. Auctions are increasingly the mechanism used to settle these contracts, replacing physical transfers of defaulted bonds between CDS sellers and buyers. Indeed, auctions will become a standard feature of all recent CDS contracts from now on. In this paper, we examine all of the CDS auctions conducted to date and evaluate their efficacy by comparing the auction outcomes to prices of the underlying bonds in the secondary market. The auctions appear to have served their purpose, as we find no evidence of inefficiency in the process: Participation is high, open interest is low, and the auction prices are close to the prices observed in the bond market before and after each auction has occurred. We qualify our conclusions by noting that relatively few auctions have taken place thus far.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 372.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:372

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Related research

Keywords: Swaps (Finance) ; Auctions ; Contracts;

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References

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  1. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market," NBER Working Papers 10418, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ammer, John & Cai, Fang, 2011. "Sovereign CDS and bond pricing dynamics in emerging markets: Does the cheapest-to-deliver option matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(3), pages 369-387, July.
  2. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. John Kiff & Ron Morrow, 2000. "Credit Derivatives," Bank of Canada Review, Bank of Canada, vol. 2000(Autumn), pages 3-11.

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