CDs Auctions

44 Pages Posted: 20 Jul 2011

See all articles by Mikhail Chernov

Mikhail Chernov

UCLA Anderson

Alexander S. Gorbenko

University of Southern California - Marshall School of Business

Igor Makarov

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2011

Abstract

We analyze credit default swap settlement auctions theoretically and evaluate them empirically. In our theoretical analysis, we show that the current auction design may not result in the fair bond price and suggest modifications to the auction design to minimize mispricing. In our empirical study, we find support for our theoretical predictions. We show that an auction undervalues bonds by 10\%, on average, on the day of the auction and link this undervaluation to the number of bonds that are exchanged during the auction. We also document a V-shaped pattern in underpricing during the days surrounding the auction: in the days leading up to the auction, the extent to which bonds are underpriced declines, while after the auction, the extent to which they are underpriced increases, with the smallest underpricing coming on the day of the auction.

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

JEL Classification: D44, G10, G13

Suggested Citation

Chernov, Mikhail and Gorbenko, Alexander S. and Makarov, Igor, CDs Auctions (June 2011). CEPR Discussion Paper No. DP8456, Available at SSRN: https://ssrn.com/abstract=1889959

Mikhail Chernov (Contact Author)

UCLA Anderson ( email )

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

Alexander S. Gorbenko

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Igor Makarov

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

Houghton Street
London, WC2A 2AE
United Kingdom

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