CDS Credit-Event Auctions

45 Pages Posted: 10 Sep 2013

See all articles by Sudip Gupta

Sudip Gupta

Fordham University - Finance Area

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 2011

Abstract

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 rst part, we look at the ecacy of price discovery in the auction. We nd that the auction price has a signicant 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 is very valuable for post-auction market price formation. In the second part of the analysis, we look at behavior within and across auctions and the factors that in uence 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. In the nal 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 (December 2011). NYU Working Paper No. 2451/31363. Available at SSRN: https://ssrn.com/abstract=2323473

Sudip Gupta

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States

Rangarajan K. Sundaram (Contact Author)

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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