Credit Default Swaps: Past, Present, and Future

Authors: Augustin, P., Subrahmanyam, M. G., Tang, D. Y., and Wang, S. Q.

Publications: Annual Review of Financial Economics

Abstract:
Credit default swaps (CDS) have grown to be a multi-trillion-dollar, globally important market. The academic literature on CDS has developed in parallel with the market practices, public debates, and regulatory initiatives in this market. We selectively review the extant literature, identify remaining gaps, and suggest directions for future research. We present a narrative including the following four aspects. First, we discuss the bene ts and costs of CDS, emphasizing the need for more research in order to better understand the welfare implications. Second, we provide an overview of the post-crisis market structure and the new regulatory framework for CDS. Third, we place CDS in the intersection of law and nance, focusing on agency conficts and nancial intermediation. Last, we examine the role of CDS in international finance, especially during and after the recent sovereign credit crises.

Annual Review of Financial Economics, Forthcoming