Credit Default Swaps and the Credit Crisis

The credit default swap market has experienced an exponential growth in recent decades. Though the fırst credit default swap contract was negotiated in the mid-1990s, the market has enjoyed a surge of popularity beginning in 2003. By the end of June 2013, the outstanding amount reached 24.3 trillion dollars. It is mostly used to transfer or to hedge credit risk. Concurrently with the global credit crisis, several shortcomings in CDS markets have appeared. One of the obvious questions is whether they affect the stability of financial markets. In this context after broader exhibition of credit default swaps market, speculative use of CDS, inception of central counterparty, and transparency of CDS market is handled. As a conclusion, it is true that the CDS market still has some weaknesses, but it is no more prone to be destabilizing than other financial instruments. This is shown in this chapter.

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Credit Default Swaps and the Credit Crisis

The Journal of Economic Perspectives ◽

10.1257/jep.24.1.73 ◽

2010 ◽

Vol 24 (1) ◽

pp. 73-92 ◽

Cited By ~ 254

Author(s):

René M Stulz

Keyword(s):

Social Welfare ◽

Credit Default Swaps ◽

Counterparty Risk ◽

Credit Crisis ◽

Over The Counter ◽

Bilateral Contracts ◽

Financial Strength ◽

The Social ◽

Credit Default

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 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 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 to quantify the social gains and costs of derivatives in general and credit default swaps in particular.

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The Rise of Credit Default Swaps and Its Implications on Financial Stability

Handbook of Research on Developing Sustainable Value in Economics, Finance, and Marketing - Advances in Finance, Accounting, and Economics ◽

10.4018/978-1-4666-6635-1.ch020 ◽

2015 ◽

pp. 341-354

Author(s):

Fatma Sezer Dural

Keyword(s):

Credit Risk ◽

Exponential Growth ◽

Financial Stability ◽

Credit Default Swap ◽

Credit Default Swaps ◽

Financial Instruments ◽

Credit Crisis ◽

Credit Default ◽

Default Swap ◽

The Stability

The credit default swap market has experienced an exponential growth in recent decades. Though the first credit default swap contract was negotiated in the mid-1990s, the market has enjoyed a surge of popularity beginning in 2003. By the end of June 2013, the outstanding amount reached 24.3 trillion dollars. It is mostly used to transfer or to hedge credit risk. Concurrently with the global credit crisis, several shortcomings in CDS markets have appeared. One of the obvious questions is whether they affect the stability of financial markets. In this context after broader exhibition of credit default swaps market, speculative use of CDS, inception of central counterparty, and transparency of CDS market is handled. As a conclusion, it is true that the CDS market still has some weaknesses, but it is no more prone to be destabilizing than other financial instruments. This is shown in this chapter.

Download Full-text