Credit Default Swap Regulation in Experimental Bond Markets

Item Type Journal paper
Abstract

Credit default swaps (CDS) played an important role in the financial crisis of 2008. While CDS can be used to hedge risks, they can also be used for speculative purposes (as occurred during the financial crisis) and regulations have been proposed to limit such speculative use. Here, we provide the first controlled experiment analyzing the pricing of credit default swaps in a bond market subject to default risk. We further use the laboratory as a testbed to analyze CDS regulation. Our results show that the regulation achieves the goal of increasing the use of CDS for hedging purposes while reducing the use of CDS for speculation. This success does not come at the expense of lower bond IPO revenues and does not negatively affect CDS prices or bond prices in the secondary market.

Authors Weber, Matthias; Duffy, John & Schram, Arthur
Journal or Publication Title Working Papers on Finance, No. 2019/05, University of St. Gallen
Language English
Subjects economics
finance
HSG Classification contribution to scientific community
Refereed No
Date June 2019
Depositing User Prof. Dr. Matthias Weber
Date Deposited 20 Jun 2019 13:06
Last Modified 21 Jun 2019 12:58
URI: https://www.alexandria.unisg.ch/publications/257201

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Citation

Weber, Matthias; Duffy, John & Schram, Arthur (2019) Credit Default Swap Regulation in Experimental Bond Markets. Working Papers on Finance, No. 2019/05, University of St. Gallen,

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https://www.alexandria.unisg.ch/id/eprint/257201
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