Credit Default Swap Regulation in Experimental Bond Markets
John Duffy () and
Arthur Schram ()
No 19-039/I, Tinbergen Institute Discussion Papers from Tinbergen Institute
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.
Keywords: Experimental finance; asset market experiment; CDS; financial regulation; behavioral finance (search for similar items in EconPapers)
JEL-codes: D53 G40 C92 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Working Paper: Credit Default Swap Regulation in Experimental Bond Markets (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20190039
Access Statistics for this paper
More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().