PT  - JOURNAL ARTICLE
AU  - Sudip Gupta
AU  - Rangarajan K. Sundaram
TI  - Inventory Effects, the Winner’s Curse, and Bid Shading in Credit Default Swap Auction Outcomes
AID  - 10.3905/jod.2015.23.2.036
DP  - 2015 Nov 30
TA  - The Journal of Derivatives
PG  - 36--52
VI  - 23
IP  - 2
4099  - https://pm-research.com/content/23/2/36.short
4100  - https://pm-research.com/content/23/2/36.full
AB  - This article studies bidding behavior in the novel and complex auctions that, since 2005, have determined recovery rates in the multi-trillion dollar credit default swap (CDS) market. We find that bids are substantially influenced by inventory effects (bidders’ CDS positions entering the auction), market illiquidity, and “winners curse” considerations. The economically and statistically significant extent of “bid-shading” induced by these factors explains why auction prices deviate significantly (on average >16%) from pre- and post-auction market prices for the same instruments even while auction-generated information is significantly informative for post-auction market price formation.TOPICS: Credit default swaps, statistical methods