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Credit Market Choice

Author

Listed:
  • Nina Boyarchenko
  • Anna M. Costello
  • Or Shachar

Abstract

Credit default swaps (CDS) are frequently credited with being the cause of AIG?s collapse during the financial crisis. A Reuters article from September 2008, for example, notes ?[w]hen you hear that the collapse of AIG [?] might lead to a systemic collapse of the global financial system, the feared culprit is, largely, that once-obscure [?] instrument known as a credit default swap.? Yet, despite the prominent role that CDS played during the financial crisis, little is known about how individual financial institutions utilize CDS contracts on individual companies. In a recent New York Fed staff report, we assess the choice banks face when trading the idiosyncratic credit risk of a firm, and argue that banks? participation decisions have been affected in the post-regulation period, either by direct changes in market structure or by changes in the relative cost of pursuing different strategies.

Suggested Citation

  • Nina Boyarchenko & Anna M. Costello & Or Shachar, 2018. "Credit Market Choice," Liberty Street Economics 20181017, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:87289
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    References listed on IDEAS

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    Cited by:

    1. Mark Paddrik & Stathis Tompaidis, 2019. "Market-Making Costs and Liquidity: Evidence from CDS Markets," Working Papers 19-01, Office of Financial Research, US Department of the Treasury.
    2. Czech, Robert, 2019. "Credit default swaps and corporate bond trading," Bank of England working papers 810, Bank of England.
    3. Nina Boyarchenko & Anna Kovner & Or Shachar, 2020. "It’s What You Say and What You Buy: A Holistic Evaluation of the Corporate Credit Facilities," Staff Reports 935, Federal Reserve Bank of New York.
    4. Richard K. Crump & Joao A. C. Santos, 2018. "Review of New York Fed studies on the effects of post-crisis banking reforms," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 71-90.

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    More about this item

    Keywords

    CDS; regulations; hedging; Corporate Bonds;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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