Credit Default Swaps and the Credit Crisis
René M. Stulz
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
September 18, 2009
Charles A. Dice Center Working Paper No. 2009-16
Fisher College of Business Working Paper No. 2009-03-16
ECGI - Finance Working Paper No. 264/2009
Many observers have argued that credit default swaps contributed significantly to the credit crisis. Of particular concern to these observers are that credit default swaps trade in the largely unregulated over-the-counter market as bilateral contracts involving counter-party risk and that they facilitate speculation involving negative views of a firm’s financial strength. Some observers have suggested that credit default swaps would not have made the crisis worse had they been traded on exchanges. I conclude that credit default swaps did not cause the dramatic events of the credit crisis, that the over-the-counter credit default swaps market worked well during much of the first year of the credit crisis, and that exchange trading has both advantages and costs compared to over-the-counter trading. Though I argue that eliminating over-the-counter trading of credit default swaps could reduce social welfare, I also recognize that much research is needed to understand better and quantify the social gains and costs of derivatives in general and credit default swaps in particular.
Number of Pages in PDF File: 47
JEL Classification: G01, G13, G14, G18, G21, G24, G28
Date posted: September 29, 2009 ; Last revised: September 27, 2010
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