Are CDS Auctions Biased and Inefficient?

Forthcoming, Journal of Finance

47 Pages Posted: 10 Apr 2011 Last revised: 3 Nov 2016

See all articles by Songzi Du

Songzi Du

University of California, San Diego (UCSD) - Department of Economics

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: November 2, 2016

Abstract

We study the design of CDS auctions, which determine the payments by CDS sellers to CDS buyers following the defaults of bonds. Through a simple model, we find that the current design of CDS auctions leads to biased prices and inefficient allocations. This is because various restrictions imposed in CDS auctions prevent certain investors from participating in the price-discovery and allocation process. The imposition of a price cap or floor also gives dealers large influence on the final auction price. We propose an alternative double auction design that delivers more efficient price discovery and allocations.

Keywords: credit default swaps, credit event auctions, price bias, manipulation, allocative efficiency, double auction

JEL Classification: G12, G14, D44

Suggested Citation

Du, Songzi and Zhu, Haoxiang, Are CDS Auctions Biased and Inefficient? (November 2, 2016). Forthcoming, Journal of Finance, Available at SSRN: https://ssrn.com/abstract=1804610 or http://dx.doi.org/10.2139/ssrn.1804610

Songzi Du

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

Haoxiang Zhu (Contact Author)

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

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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