Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2019-06-10
Number: 19-039/I
Author-Name: Matthias Weber
Author-Workplace-Name: University of St. Gallen
Author-Name: John Duffy
Author-Workplace-Name: UC Irvine
Author-Name: Arthur Schram
Author-Workplace-Name: University of Amsterdam
Title: Credit Default Swap Regulation in Experimental Bond Markets
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 occurred 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.
Classification-JEL: D53, G40, C92
Keywords: Experimental finance, asset market experiment, CDS, financial regulation, behavioral finance
File-URL: https://papers.tinbergen.nl/19039.pdf
File-Format: application/pdf
File-Size: 568388 bytes
Handle: RePEc:tin:wpaper:20190039