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The Liar equilibrium in naked sovereign CDS trading : a financial economic approach

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  • Qiaoyang Zheng

    (UP1 UFR02 - Université Paris 1, Panthéon-Sorbonne - UFR d'Économie - Université Paris I - Panthéon Sorbonne)

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    Abstract

    This master's thesis aims at studying the impact of naked sovereign CDS trading by establishing a sequential trading model where the evolution of the market microstructure bid-ask spread is taken into account. The underlying-asset-covered positions as welle as the naked positions are distinguished according to their different motifs in trading CDS. The main findings of our model suggest that the naked traders always prefer to deviate from the covered traders' equilibrium strategies in pursuit of the maximum profit, by manipulating following traders' belief and deceiving them into the wrong informational cascade. Consequently, an earlier start of a more possible wrong cascading effect occurs, resulting in a less accurate market estimation of the underlying country's default risk.

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    File URL: http://dumas.ccsd.cnrs.fr/docs/00/65/17/82/PDF/ZHENG_Qiaoyang.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number dumas-00651782.

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    Date of creation: 30 Jun 2011
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    Handle: RePEc:hal:journl:dumas-00651782

    Note: View the original document on HAL open archive server: http://dumas.ccsd.cnrs.fr/dumas-00651782/en/
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    Related research

    Keywords: sovereign CDS covered and naked trading microstructure cascading effect liar equilibrium;

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