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Credit Default Swaps and the Credit Crisis

The Journal of economic perspectives, 2010-01, Vol.24 (1), p.73-92 [Peer Reviewed Journal]

Copyright © 2010 American Economic Association ;Copyright American Economic Association Winter 2010 ;ISSN: 0895-3309 ;EISSN: 1944-7965 ;DOI: 10.1257/jep.24.1.73

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Title:
Credit Default Swaps and the Credit Crisis
Author: Stulz, René M.
Subjects: Bank credit ; Bank loans ; Clearinghouses ; Comparative analysis ; Credit default swaps ; Credit insurance ; Credit market ; Credit risk ; Currency market ; Debt restructuring ; Default ; Derivatives ; Economic crisis ; Exchange market ; Financial crisis ; Financial economics ; Hedge funds ; Interest rates ; International finance ; Investors ; Loan defaults ; Monetary economics ; Over the counter trading ; Payments ; Risk management ; Securities trading ; Studies ; Subprime lending ; Symposium: Financial Plumbing ; Trade
Is Part Of: The Journal of economic perspectives, 2010-01, Vol.24 (1), p.73-92
Description: Many observers have argued that credit default swaps contributed significantly to the credit crisis. Of particular concern to these observers are that credit default swaps trade in the largely unregulated over-the-counter market as bilateral contracts involving counterparty risk and that they facilitate speculation involving negative views of a firm's financial strength. Some observers have suggested that credit default swaps would not have made the crisis worse had they traded on exchanges. I conclude that credit default swaps did not cause the dramatic events of the credit crisis, that the over-the-counter credit default swaps market worked well during much of the crisis, and that exchange trading has both advantages and costs compared to over-the-counter trading. Though I argue that eliminating over-the-counter trading of credit default swaps could reduce social welfare, I also recognize that much research is needed to understand better and to quantify the social gains and costs of derivatives in general and credit default swaps in particular.
Publisher: Nashville: American Economic Association
Language: English
Identifier: ISSN: 0895-3309
EISSN: 1944-7965
DOI: 10.1257/jep.24.1.73
Source: ProQuest Central

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Credit Default Swaps and the Credit Crisis

Copyright © 2010 American Economic Association ;Copyright American Economic Association Winter 2010 ;ISSN: 0895-3309 ;EISSN: 1944-7965 ;DOI: 10.1257/jep.24.1.73

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