Discussion Paper

Credit Market Choice


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;

JEL Classification: G3;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2018-10-17

Number: 20181017