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Credit Default Swaps and the Credit Crisis

René Stulz

No 15384, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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 been 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 first year of the credit 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 quantify the social gains and costs of derivatives in general and credit default swaps in particular.

JEL-codes: G01 G13 G14 G18 G21 G24 G28 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
Note: CF
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Published as Rene M. Stulz, 2010. "Credit Default Swaps and the Credit Crisis," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 73-92, Winter.

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