The sincerity of Credit Default Swaps

Johnson, T. (Speaker)

Activity: Talk or presentationInvited talk

Description

I relate SPVs to the medieval triple contract that involved a loan, cashflow transformation and credit enhancement (the 3 contracts) and were declared usurious in ?1516 on account of guaranteeing a return (i.e. breach reciprocity). The Potts opinion distinguishes a CDS from and insurance contract and a wager. This is often disputed (e.g. Kimball -Stanley) on the basis that a CDS resembles an insurance contract and so should be governed by (strict) insurance legislation. I disagree, the point of the Potts opinion is to enable CDS to be traded in the 'canonical market mechanism', i.e. market-makers simultaneously quoting bid and offers. I argue that this imposes a sincerity on their pricing that is not possible if they were priced as insurance contracts. The role of CDS in enabling sub-prime lending is another facet and connects to charity.
Period20 Oct 2017
Held atEAEPE Annual Conference
Event typeConference
LocationBudapest, Hungary
Degree of RecognitionInternational

ASJC Scopus subject areas

  • Finance
  • Sociology and Political Science
  • Mathematics (miscellaneous)