CDS Auctions

Chernov, Mikhail; Gorbenko, Alexander S.; Makarov, Igor

doi:10.1093/rfs/hhs124

Cited by 40 publications

(39 citation statements)

References 24 publications

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“…In addition, the "recovery basis", the difference between the recovery implied by the CDS final auction price and the recovery implicit in bond prices, is typically close to zero. Similar conclusions are shared by Coudert and Gex (2010) An important theoretical contribution for this topic is provided by Chernov and Makarov (2012), who theoretically model the two-stage auction process and show that strategic bidding may result in either under-or overpricing relative to the fair bond price. Their empirical evaluation, however, suggests that historically, bonds have on average been underpriced by 6%.…”

Section: Cds Auctionsmentioning

confidence: 58%

“…There are several studies analyzing the various aspects of the CDS auction mechanism. Three of these are empirical (Helwege et al (2009), Coudert andGex (2010), Gupta and Sundaram (2013)), while two other studies investigate the process from a theoretical perspective (Chernov and Makarov (2012), Du and Zhu (2013)). The most complete picture to date is probably given by Gupta and Sundaram (2013), who study a total of 76 auctions over the period [2008][2009][2010].…”

Section: Cds Auctionsmentioning

confidence: 99%

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Credit Default Swaps: A Survey

et al. 2014

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Credit default swaps (CDS) have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly after the credit crisis of 2008-2009 and the European sovereign crisis of 2010-2012. We review the extant literature on CDS that has accumulated over the past two decades. We divide our survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles as well as from that of structural and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the related bond and equity markets, with an emphasis on the closely related concepts of market efficiency, price discovery, information flow and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market, which leads to a discussion on capital structure arbitrage. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and both external and internal corporate governance. The sixth section summarizes the literature that takes into account how CDS may impact the incentives of the various agents in the economy and the associated impact on the pricing of the contracts. In particular, we examine how CDS may alter the debtor-creditor relationship. Section seven reviews the growing literature on sovereign CDS and highlights the major conceptual and contractual differences between the sovereign and corporate CDS markets. In section eight, we discuss CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. We close with our suggestions for promising future research directions on CDS contracts and markets.

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Section: Cds Auctionsmentioning

confidence: 58%

Section: Cds Auctionsmentioning

confidence: 99%

Credit Default Swaps: A Survey

et al. 2014

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“…We then describe the auction rules and use the recent Toys R Us auction as an example. In order to illustrate frontier research on the topic, we discuss the theoretical results presented in Chernov et al (2013) and extend their empirical …ndings. Chernov et al (2013) highlight important incentives that participants have during CDS auctions.…”

Section: Figure 1 a Cds Contractmentioning

confidence: 97%

“…In order to illustrate frontier research on the topic, we discuss the theoretical results presented in Chernov et al (2013) and extend their empirical …ndings. Chernov et al (2013) highlight important incentives that participants have during CDS auctions. 2 In particular, they show that dealers have an incentive to manipulate the auction price to get better terms when they settle their CDS contracts.…”

Section: Figure 1 a Cds Contractmentioning

confidence: 97%

“…2 In particular, they show that dealers have an incentive to manipulate the auction price to get better terms when they settle their CDS contracts. These theoretical predictions can be empirically tested, and Chernov et al (2013) successfully tested one of them. After extending their data to include more recent auctions, we show that their empirical results are also consistent when more recent data are included.…”

Section: Figure 1 a Cds Contractmentioning

confidence: 99%

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CDS Auctions: An Overview

Sultanum¹,

Paulos²,

Tobin³

2019

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A credit default swap (CDS) is a credit derivative that can be used as insurance against a reference entity's credit risk, where a reference entity is either a government or corporation that has issued debt. If a party owns equal amounts of bonds and CDSs for a particular reference entity, then the party is completely insured against a negative credit event. However, unlike insurance, it is possible to own more of the CDS protection than of the underlying bond. In this way, CDS contracts make it possible to trade on an entity's credit risk without having exposure to the entity's actual bonds. Figure 1 summarizes how CDS contracts work. A CDS contract is a bilateral agreement between a protection seller and a protection buyer. The former is taking a short position in the CDS, while the latter is taking a long position. The protection seller compensates the protection buyer if there is a credit event with respect to any of the bonds issued by the contract's reference entity. Credit events include bankruptcy, failure to pay, and restructuring, among others. In exchange, the protection buyer makes periodic interest payments to the protection seller until the contract expires.CDS auctions are the main settlement mechanism for CDS contracts. The auction provides a unique price for the defaulted bond, which directly impacts the amount that the protection seller needs to pay the protection buyer if a credit event occurs. In this way, CDS auctions have direct in ‡uence on payouts in the CDS market, a market that had approximately $10 trillion in contracts outstanding by the end of 2007. 1 Considering the size of the CDS market, understanding how CDS auctions function is extremely important for CDS users and regulators.Any opinions expressed are those of the authors and do not necessarily re ‡ect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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