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Regulation and the demand for credit default swaps in experimental bond markets

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  • Weber, Matthias
  • Duffy, John
  • Schram, Arthur

Abstract

Credit default swaps (CDS) played an important role in the financial crisis of 2008 leading to calls for regulation. Here, we seek to understand the impact of a CDS regulation that restricts the possibility to hold naked CDS. We use a controlled laboratory experiment analyzing CDS pricing in a bond market subject to default risk. 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 initial public offering (IPO) prices for the bonds or worse pricing of bonds or CDS in the secondary market.

Suggested Citation

  • Weber, Matthias & Duffy, John & Schram, Arthur, 2024. "Regulation and the demand for credit default swaps in experimental bond markets," European Economic Review, Elsevier, vol. 165(C).
    • Handle: RePEc:eee:eecrev:v:165:y:2024:i:c:s0014292124000746
    DOI: 10.1016/j.euroecorev.2024.104745
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    More about this item

    Keywords

    Experimental finance; Asset market experiment; CDS; Financial regulation;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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