Economic consequences of speculative side bets: The case of naked CDS

Fri, 09/03/2010 - 20:00 EDT - Vox - EU

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Yeon-Koo Che, Rajiv Sethi, 4 September 2010The role of naked credit default swaps in the global crisis is an ongoing source of controversy. This column seeks to add some formal analysis to the debate. Its model finds that speculative side bets can have significant effects on economic fundamentals, including the terms of financing, the likelihood of default, and the scale and composition of investment expenditures. Full Article: Economic consequences of speculative side bets: The case of naked CDS

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Which Nations Are Next? The Credit Market Answers
The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the outbreak of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring.
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Felix Salmon submits: Rajiv Sethi has a good blog entry taking issue with my view on credit default swaps, which The Money Demand does an equally good job of answering. But Rajiv then asks this question in the comments:
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Felix Salmon savages the New York Times, and Gretchen Morgenstern in particular, for the claim that credit default swaps have somehow been pivotal in the financial crises that have rocked the US and Europe.
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Felix Salmon savages the New York Times, and Gretchen Morgenstern in particular, for the claim that credit default swaps have somehow been pivotal in the financial crises that have rocked the US and Europe.
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Felix Salmon savages the New York Times, and Gretchen Morgenstern in particular, for the claim that credit default swaps have somehow been pivotal in the financial crises that have rocked the US and Europe.
The European ban on naked sovereign credit default swaps: A fake good idea
Anne-Laure Delatte, 23 July 2012Uncovered sovereign credit default swaps will be permanently prohibited in the EU by November 2012. While empirical evidence on their destabilising role is mounting, this column argues that the EU regulation will have only a limited effect, as a number of inconsistencies create regulatory arbitrage and opportunities to circumvent the ban. Full Article: The European ban on naked sovereign credit default swaps: A fake good idea
Why I Am Against Naked Credit Default Swaps
By Lok Sang Ho:Those who argue in favor of “naked CDS” (credit default swaps) say it will increase the liquidity of the market. This argument is valid. In a sense, naked CDS is like short selling. Short sales allow those who believe a security is to fall in price “sell” it even though they may not own it. Permitting short sales is widely believed to allow more efficient price discovery — so that prices will more quickly adjust to their appropriate levels that reflect a more informed market.

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Economic consequences of speculative side bets: The case of naked CDS

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