New Rules for Credit Default Swap Trading: Can We Now Follow the Risk?

Carlson, John B.; Jacobson, Margaret

doi:10.26509/frbc-ec-201411

Cited by 3 publications

(3 citation statements)

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“…Concerns about the destabilizing effects of credit default swaps prompted policy reforms articulated in the Basel III Accord and in the U.S. codified in the Dodd‐Frank legislation (Carlson & Jacobson, 2014). These reforms were mainly aimed at improving transparency and reducing an excessive accumulation of risk by a single issuer 33 .…”

Section: Policies Affecting Individual Financial Institutionsmentioning

confidence: 99%

Policy experiments and financial regulation: Using laboratory methods to evaluate responses to the 2007–2009 financial crisis

Davis

Korenok

2022

Journal of Economic Surveys

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This paper reviews an emerging experimental literature that uses laboratory methods to both identify causes of the 2007–2009 financial crisis, and to assess the effectiveness of policies implemented in response. Papers reviewed include experiments conducted to evaluate central bank and Treasury responses to the crisis, experiments that study the consequences of interconnectedness between financial firms on financial system stability, and experiments conducted to evaluate policies intended to more effectively regulate specific types of financial institutions. Laboratory methods are ideally suited to investigating the consequences of untested policies in new environmental circumstances – just the situation provoked by the crisis. The continually evolving structure of the financial system suggests an expanded future role for laboratory methods in this area.

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Section: Policies Affecting Individual Financial Institutionsmentioning

confidence: 99%

Policy experiments and financial regulation: Using laboratory methods to evaluate responses to the 2007–2009 financial crisis

Davis

Korenok

2022

Journal of Economic Surveys

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“…To address the opacity of over‐the‐counter (OTC) markets, the Dodd–Frank Act requires four primary actions to improve market transparency. Carlson and Jacobson (2014) observed that the regulation does not effectively alter incentives for systemically important financial institutions (SIFI) to become too big to fail. It remains to be seen if risk is being transferred to those capable of absorbing that risk in a crisis.…”

Section: Introductionmentioning

confidence: 99%

Enhanced disclosure of credit derivatives, information asymmetry and credit risk

Zhao

2021

Business Fin & Account

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This study examines the extent to which enhanced disclosure of credit derivatives [Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standards (FAS) No. 133‐1] reduces information asymmetry and credit derivative sellers who experience a decrease in information asymmetry. I find that bid‐ask spread for credit derivative sellers with positive net protection is reduced in the post‐period, whereas that of sellers with negative net protection and the control groups is not. These results are consistent with the conjecture that market participants use enhanced disclosure to confirm or correct previous expectations about sellers’ credit risk. In addition, results in high versus low institutional groups suggest that bid‐ask spreads reduce in both groups but reduce more in the high institutional group in the post‐period, possibly due to information environment differences. Finally, I investigate the information content of two credit derivative exposure measures: maximum payment amount and fair value. Consistent with McAnally (1996), I find that the maximum payment amount is credit risk‐relevant. Thus, enhanced disclosure facilitates monitoring risk concentration and evaluating credit risk, thereby contributing to the stabilization of capital markets prior to regulation of the credit default swap (CDS) market.

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“…The regulation of the CDS market is thus a relevant policy issue and some regulatory efforts have been made in the aftermath of the financial crisis. In particular, the G-20 agreed to reforms at their August 2009 meeting that were subsequently codified in the United States in the Dodd-Frank legislation (Carlson and Jacobson, 2014). These reforms were mainly aimed at improving transparency and avoiding excessive accumulation of risk by a single CDS issuer (e.g., the American Insurance Group).…”

Section: Introductionmentioning

confidence: 99%

Credit Default Swap Regulation in Experimental Bond Markets

2019

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Credit default swaps (CDS) played an important role in the financial crisis of 2008. While CDS can be used to hedge risks, they can also be used for speculative purposes (as occurred during the financial crisis) and regulations have been proposed to limit such speculative use. Here, we provide the first controlled experiment analyzing the pricing of credit default swaps in a bond market subject to default risk. We further use the laboratory as a testbed to analyze CDS regulation. Our results show that the regulation achieves the goal of increasing the use of CDS for hedging purposes while reducing the use of CDS for speculation. This success does not come at the expense of lower bond IPO revenues and does not negatively affect CDS prices or bond prices in the secondary market.

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New Rules for Credit Default Swap Trading: Can We Now Follow the Risk?

Cited by 3 publications

References 0 publications

Policy experiments and financial regulation: Using laboratory methods to evaluate responses to the 2007–2009 financial crisis

Policy experiments and financial regulation: Using laboratory methods to evaluate responses to the 2007–2009 financial crisis

Enhanced disclosure of credit derivatives, information asymmetry and credit risk

Credit Default Swap Regulation in Experimental Bond Markets

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