Credit Market Choice

Nina Boyarchenko, Anna Costello and Or Shachar

No 20181017, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Credit default swaps (CDS) are frequently credited with being the cause of AIG’s collapse during the financial crisis. A Reuters article from September 2008, for example, notes “[w]hen you hear that the collapse of AIG […] might lead to a systemic collapse of the global financial system, the feared culprit is, largely, that once-obscure […] instrument known as a credit default swap.” Yet, despite the prominent role that CDS played during the financial crisis, little is known about how individual financial institutions utilize CDS contracts on individual companies. In a recent New York Fed staff report, we assess the choice banks face when trading the idiosyncratic credit risk of a firm, and argue that banks’ participation decisions have been affected in the post-regulation period, either by direct changes in market structure or by changes in the relative cost of pursuing different strategies.

Keywords: CDS; regulations; hedging; corporate bonds (search for similar items in EconPapers)
JEL-codes: G3 (search for similar items in EconPapers)
Date: 2018-10-17
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Citations: View citations in EconPapers (5)

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Working Paper: Credit Market Choice (2019)
Working Paper: Credit market choice (2018)
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