Abstract

Credit default swaps are insurance contracts on default. Currently, there are about 30 trillion USD worth of outstanding CDS contracts. These contracts are settled through a centralized market that has been criticized for underpricing the asset. In this paper, I take a mechanism design approach and characterize robust settlement mechanisms that deliver an unbiased price for the asset. A second contribution of my paper is a new notion of the core of a game of incomplete information. This is particularly relevant here because participation in the settlement mechanism cannot be compelled.

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