Regulation and the demand for credit default swaps in experimental bond markets

Matthias Weber, John Duffy and Arthur Schram

European Economic Review, 2024, vol. 165, issue C

Abstract: Credit default swaps (CDS) played an important role in the financial crisis of 2008 leading to calls for regulation. Here, we seek to understand the impact of a CDS regulation that restricts the possibility to hold naked CDS. We use a controlled laboratory experiment analyzing CDS pricing in a bond market subject to default risk. 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 initial public offering (IPO) prices for the bonds or worse pricing of bonds or CDS in the secondary market.

Keywords: Experimental finance; Asset market experiment; CDS; Financial regulation (search for similar items in EconPapers)
JEL-codes: C92 D53 G40 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:165:y:2024:i:c:s0014292124000746

DOI: 10.1016/j.euroecorev.2024.104745

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