CDS Credit Event Auctions

45 Pages Posted: 16 Mar 2012 Last revised: 29 Jul 2013

See all articles by Sudip Gupta

Sudip Gupta

Johns Hopkins University

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Date Written: May 25, 2013


Credit-event auctions were introduced in 2005 to facilitate cash settlement in the credit default swap market following a credit event. They have a novel two-stage structure that makes them distinct from other auction forms. This paper studies outcomes in credit-event auctions over the period 2008-10.

Our analysis is in three parts. In the first part, we look at the efficacy of price discovery in the auction. We find that the auction price has a significant bias relative to the 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 information generated in the auction has considerable impact on post-auction market prices. In the second part of the analysis, we look at behavior within and across auctions and the factors that influence it. We find, among other things, that “winner’s curse” concerns play a central role, affecting liquidity provision in the auction, the pricing bias, and bidders’ within-auction updating of their private information based on information revealed in the auction’s first stage. In the final part of the paper, under some simplifying assumptions, we carry out a structural estimation to recover the underlying distribution of signals. Using these estimates, we find that the alternative auction formats could reduce the amount of bias in the auction final price.

Suggested Citation

Gupta, Sudip and Sundaram, Rangarajan K., CDS Credit Event Auctions (May 25, 2013). Available at SSRN: or

Sudip Gupta (Contact Author)

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
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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