FRIC Extended Practitioner Seminar with Haoxiang Zhu, MIT Sloan School of Management
Upcoming Seminar with Haoxiang Zhu, MIT Sloan School of Management
Program:
13.30-15.00 Haoxiang Zhu: Are CDS Auctions Biased?
With Songzi Du, Simon Fraser University
Abstract: We study the design of settlement auctions for credit default swaps (CDS). We find that the one-sided design of CDS auctions currently used in practice gives CDS buyers and sellers strong incentives to distort the final auction price, in order to profit from existing CDS positions. In the absence of frictions, the current auction mechanism tends to overprice defaulted bonds given an excess supply and underprice them given an excess demand. We propose a double auction to mitigate price biases and provide robust price discovery. The predictions of our theory on bidding behavior are consistent with CDS auction data.
See the full paper here
15.00-15.30 Coffee Break
15.30-17.00 Haoxiang Zhu: Does a Central Clearing Counterparty Reduce Counterparty Risk?
With Darrel Duffie, Graduate School of Business, Stanford University
Abstract: We show whether central clearing of a particular class of derivatives lowers counterparty risk. For plausible cases, adding a central clearing counterparty (CCP) for a class of derivatives such as credit default swaps reduces netting efficiency, leading to an increase in average exposure to counterparty default. Further, clearing different classes of derivatives in separate CCPs always increases counterparty exposures relative to clearing the combined set of derivatives in a single CCP. We provide theory as well as illustrative numerical examples of these results that are calibrated to notional derivatives position data for major banks.
See the full paper here
PARTICIPATION
If you wish to participate in the FRIC Extended Practitioner Seminar, please register by sending an email to fric@cbs.dk indicating your full name and affiliation at the latest Thursday November 29 at 11.30 a.m.
For more information about Haoxiang Zhu, please see here