Abstract

http://ssrn.com/abstract=1804610
 
 

References (23)



 
 

Citations (2)



 


 



Are CDS Auctions Biased and Inefficient?


Songzi Du


Simon Fraser University (SFU) - Department of Economics

Haoxiang Zhu


Massachusetts Institute of Technology (MIT) - Sloan School of Management

December 7, 2013


Abstract:     
We study the design of settlement auctions for credit default swaps (CDS) and the associated price efficiency and allocative efficiency. Implemented as a two-stage mechanism, CDS auctions determine the insurance payments from CDS sellers to CDS buyers, following the defaults of corporations and sovereigns. Using a simple model of divisible auction, we characterize equilibrium strategies in both stages of the auction. Various restrictions currently imposed in the auction prevent the full participation of certain investors, leading to systematically biased prices and inefficient post-auction allocations. Imposing price caps and floors can mitigate price bias but exacerbate allocative inefficiency. We propose a double auction that delivers robust price discovery and more efficient allocations.

Number of Pages in PDF File: 50

Keywords: Credit Default Swaps, Credit Event Auctions, Price Bias, Allocative Efficiency, Double Auction

JEL Classification: G12, G14, D44

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Date posted: April 10, 2011 ; Last revised: December 8, 2013

Suggested Citation

Du, Songzi and Zhu, Haoxiang, Are CDS Auctions Biased and Inefficient? (December 7, 2013). Available at SSRN: http://ssrn.com/abstract=1804610 or http://dx.doi.org/10.2139/ssrn.1804610

Contact Information

Songzi Du
Simon Fraser University (SFU) - Department of Economics ( email )
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
HOME PAGE: http://www.sfu.ca/~songzid
Haoxiang Zhu (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 MEMORIAL DRIVE
E62-416
Cambridge, MA 02142-1347
United States
HOME PAGE: http://www.mit.edu/~zhuh
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