Default Ambiguity: Credit Default Swaps Create New Systemic Risks in Financial Networks

• 成果类型: Article
• 署名作者: Schuldenzucker, Steffen; Seuken, Sven; Battiston, Stefano
• 署名单位: University of Zurich; University of Zurich; Swiss Finance Institute (SFI)
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2019.3304
• 发表日期: 2020
• 页码: 1981-1998
• 关键词: Financial networks; Credit Default Swaps; Systemic risk; clearing systems

摘要

We study financial networks and reveal a new kind of systemic risk arising from what we call default ambiguity-that is, a situation where it is impossible to decide which banks are in default. Specifically, we study the clearing problem: given a network of banks interconnected by financial contracts, determine which banks are in default and what percentage of their liabilities they can pay. Prior work has shown that when banks can only enter into debt contracts with each other, this problem always has a unique maximal solution. We first prove that when banks can also enter into credit default swaps (CDSs), the clearing problem may have no solution or multiple conflicting solutions, thus leading to default ambiguity. We then derive sufficient conditions on the network structure to eliminate these issues. Finally, we discuss policy implications for the CDS market.