The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu The leading online blog in the fields of corporate governance and financial regulation. Fri, 19 Jun 2026 11:32:21 +0000 en-US hourly 1 https://wordpress.org/?v=6.5.8 https://corpgov.law.harvard.edu/wp-content/uploads/2024/02/cropped-photography-4-e1706898544564-1-32x32.png The Economics of Credit Default Swaps – The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu 32 32 The Economics of Credit Default Swaps https://corpgov.law.harvard.edu/2011/07/29/the-economics-of-credit-default-swaps/?utm_source=rss&utm_medium=rss&utm_campaign=the-economics-of-credit-default-swaps https://corpgov.law.harvard.edu/2011/07/29/the-economics-of-credit-default-swaps/#comments Fri, 29 Jul 2011 13:08:03 +0000 http://blogs.law.harvard.edu/corpgov/?p=19689?d=20150113161309EST Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday, July 29, 2011
Editor's Note:

The following post comes to us from Robert Jarrow, Professor of Finance at Cornell University.

Credit default swaps (CDS) are term insurance contracts written on the notional value of an outstanding bond. In the paper, The Economics of Credit Default Swaps, forthcoming in the Annual Review of Financial Economics, I study the economics of CDS using the economics of insurance literature as a basis for analysis. The first CDS were traded by JP Morgan in 1995. Since that time, CDS trading has grown dramatically. CDS contracts trade in the over-the-counter derivatives markets which is only loosely regulated. The CDS market exhibited exponential growth between 2001 and 2007. At its 2007 peak, total outstanding notional for CDS was over 62 trillion dollars. After the crisis, however, these numbers have halved to just over 30 trillion dollars in 2009. Most of this change in outstanding notional has occurred through “portfolio compression” as demanded by the regulators where long and short credit derivative positions on the same underlying credit entity held by the same institution are netted. The reduction is not due to decreased trading activity in CDS. This assertion is supported by the relatively stable outstanding notional of equity and interest rate and currency derivatives over this same time span.

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