Abstract

https://ssrn.com/abstract=1942727
 


 



CDS Auctions and Informative Biases in CDS Recovery Rates


Sudip Gupta


Fordham University - Finance Area

Rangarajan K. Sundaram


New York University (NYU) - Department of Finance

May 25, 2013

Journal of Derivatives, Forthcoming

Abstract:     
Introduced in 2005 to identify recovery rates and so facilitate cash settlement in the multi-trillion dollar credit default swap market, credit-event auctions have a novel and complex two-stage structure that makes them distinct from other auction forms. Examining the efficacy of the auction's price-discovery process, we find that the auction price has a significant bias relative to pre- and post-auction market prices for the same instruments, and that volatility of market prices often increases after the auction. Nonetheless, we find that the auction generates information that is critical for post-auction market price formation. Auction outcomes are heavily influenced by strategic considerations and "winner's curse" concerns that could explain the observed biases. Structural estimation of the auction carried out under some simplifying assumptions suggests that alternative auction formats could reduce the bias in the auction final price.


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Date posted: October 13, 2011 ; Last revised: January 26, 2016

Suggested Citation

Gupta, Sudip and Sundaram, Rangarajan K., CDS Auctions and Informative Biases in CDS Recovery Rates (May 25, 2013). Journal of Derivatives, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1942727 or http://dx.doi.org/10.2139/ssrn.1942727

Contact Information

Sudip Gupta (Contact Author)
Fordham University - Finance Area ( email )
33 West 60th Street
New York, NY 10023
United States

Rangarajan K. Sundaram
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)
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