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Credit Default Swaps “Shooting the Messenger”: A discussion of the CDS market and Greece’s default 22 May, 2012 - London, United Kingdom
The European sovereign CDS market has been criticised in recent years by politicians for supposedly causing price declines of government bonds of various Eurozone periphery countries. Having examined this claim, we conclude that there is no evidence for it. We argue that these claims were largely based on a misunderstanding of the different definitions of CDS spreads and bond yield spreads. While CDS spreads can lead bond spreads, we also observe the opposite effect. It is not possible to prove that there is a direct causal effect, and it is not easy to understand how such a transmission effect could work, given that the bond market is typically 10 or more times larger than the CDS market. When CDS spreads do lead bond yield spreads in an increasing direction we believe that this is due to the symmetry of CDS which accelerates the price discovery process. We argue that legislative attempts to limit the use of CDS contracts can only increase the cost of funding of Eurozone sovereigns as it imposes an additional regulatory burden and constrains the actions of hedgers and speculators, both of which are essential to an efficient price discovery process. We suggest that criticism of the CDS market was based on a misunderstanding of how the market works, and that it was unfairly blamed for expressing so clearly the market’s view of the inability of Greece to meet its excessive debt burden, a view which ultimately proved to be correct.

At a special presentation in London on May 22, 2012, Dominic O’Kane, Affiliate Professor, EDHEC Business School, will be presenting his recent research on the CDS market.

  • 5:30pm
    Registration (welcome coffee)

  • 6:00pm
    Noël Amenc, Director, EDHEC-Risk Institute

  • 6:15pm
    Presentation: “Shooting the Messenger”: A discussion of the CDS market and Greece’s default
    Dominic O’Kane, Affiliate Professor, EDHEC Business School
    • A misunderstanding of the difference between CDS and bond yield spreads;
    • The currency effect which should not be ignored;
    • Time series data cannot prove a causal relationship;
    • Alternative explanations for the link between the markets;
    • The Greek credit event examined;
    • The impact of regulations on the CDS and sovereign debt market.

  • 7:15pm
    Question & Answer Session
About the Speaker

Dominic O’Kane is an affiliated professor with EDHEC Business School. He was previously a Managing Director at Lehman Brothers where he headed the Fixed Income Quantitative Research team, covering the pricing and risk models used across credit, interest rates, FX and commodity derivatives. He was at Lehman for over 7 years. Previously he spent 3 years at Salomon Brothers. He has a doctorate in theoretical physics from the University of Oxford.
Event Details
  When   Between 22/05/2012 05:30 PM and 22/05/2012 07:30 PM
Where   EDHEC Risk Institute—Europe, 10 Fleet Place, Ludgate, London EC4M 7RB, United Kingdom
Contact Details
  Name   Séverine Anjubault
E-mail   severine.anjubault@edhec-risk.com
Phone   +33 493 187 863