Credit Default Auctions and Price Discovery

by Jean Helwege of Pennsylvania State University,
Sam Maurer of the Federal Reserve Bank of New York,
Asani Sarkar of the Federal Reserve Bank of New York, and
Yuan Wang of Pennsylvania State University

May 2009

Abstract: The rapid growth of the Credit Default Swap (CDS) market combined with increased defaults in recent years has led to increased usage of auctions when default occurs. We examine all the CDS auctions conducted to date and evaluate their efficacy by comparing auction outcomes to prices of bonds in the secondary market. The auctions appear to have served their purpose, as we see no evidence of inefficiency in the process: participation is high, open interest is low, and the prices were similar to the prices observed before and after in the bond market. We qualify our conclusions by observing that few auctions have taken place so far.

JEL Classification: G33, G12.

Keywords: credit default swaps, auctions, default, corporate bonds.

Forthcoming in: Journal of Fixed Income.

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