CDS Auctions

56 Pages Posted: 17 Jun 2011 Last revised: 20 Jul 2012

See all articles by Mikhail Chernov

Mikhail Chernov

UCLA Anderson

Alexander S. Gorbenko

University College London - Department of Economics and School of Management

Igor Makarov

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2011


We analyze auctions for the settlement of credit default swaps (CDS) theoretically and evaluate them empirically. The requirement to settle in cash with an option to settle physically leads to an unusual two-stage process. In the first stage, participants affect the amount of the bonds to be auctioned off in the second stage. Participants in the second stage may hold positions in derivatives on the assets being auctioned. We show that the final auction price might be either above or below the fair bond price, due to strategic bidding on the part of participants holding CDS. Empirically, we observe both types of outcomes, with undervaluation occurring in most cases. We find that auctions undervalue bonds by an average of 6% on the auction day. Undervaluation is related positively to the amount of bonds exchanged in the second stage of the auction, as predicted by theory. We suggest modifications of the settlement procedure to minimize the underpricing.

Keywords: credit default swaps, auctions, settlement, open interest

JEL Classification: G10, G13, D44

Suggested Citation

Chernov, Mikhail and Gorbenko, Alexander S. and Makarov, Igor, CDS Auctions (June 1, 2011). Available at SSRN: or

Mikhail Chernov

UCLA Anderson ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Alexander S. Gorbenko

University College London - Department of Economics and School of Management ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

Igor Makarov (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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