Credit Default Swaps and the Credit Crisis

47 Pages Posted: 29 Sep 2009 Last revised: 27 Sep 2010

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2009

Abstract

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.

JEL Classification: G01, G13, G14, G18, G21, G24, G28

Suggested Citation

Stulz, René M., Credit Default Swaps and the Credit Crisis (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. Available at SSRN: https://ssrn.com/abstract=1475323 or http://dx.doi.org/10.2139/ssrn.1475323

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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European Corporate Governance Institute (ECGI)

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Belgium

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