Credit Default Swap Auctions

25 Pages Posted: 21 May 2009 Last revised: 18 Nov 2013

Jean Helwege

UC Riverside

Samuel Maurer

Federal Reserve Banks - Federal Reserve Bank of New York

Asani Sarkar

Federal Reserve Bank of New York

Yuan Wang

John Molson School of Business, Concordia University

Date Written: May 1, 2009

Abstract

The rapid growth of the credit default swap (CDS) market and the increased number of defaults in recent years have led to major changes in the way CDS contracts are settled when default occurs. Auctions are increasingly the mechanism used to settle these contracts, replacing physical transfers of defaulted bonds between CDS sellers and buyers. Indeed, auctions will become a standard feature of all recent CDS contracts from now on. In this paper, we examine all of the CDS auctions conducted to date and evaluate their efficacy by comparing the auction outcomes to prices of the underlying bonds in the secondary market. The auctions appear to have served their purpose, as we find no evidence of inefficiency in the process: Participation is high, open interest is low, and the auction prices are close to the prices observed in the bond market before and after each auction has occurred. We qualify our conclusions by noting that relatively few auctions have taken place thus far.

Keywords: credit default swaps, settlement, auctions, recovery basis, corporate bonds, default

JEL Classification: G10, G13, G33

Suggested Citation

Helwege, Jean and Maurer, Samuel and Sarkar, Asani and Wang, Yuan, Credit Default Swap Auctions (May 1, 2009). Journal of Fixed Income, Vol. 19, No. 2, 2010. Available at SSRN: https://ssrn.com/abstract=1407272 or http://dx.doi.org/10.2139/ssrn.1407272

Jean Helwege

UC Riverside ( email )

900 University Ave
Riverside, CA 92521
United States

Samuel Maurer

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Asani Sarkar (Contact Author)

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

Yuan Wang

John Molson School of Business, Concordia University ( email )

Montreal
Canada

Paper statistics

Downloads
454
Rank
48,902
Abstract Views
2,483