Credit Default Swap Regulation in Experimental Bond Markets

Matthias Weber, John Duffy and Arthur Schram

No 1905, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: 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 occured 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: C92 D53 G40 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2019-06
New Economics Papers: this item is included in nep-exp and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Credit Default Swap Regulation in Experimental Bond Markets (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2019:05

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