School Brown Bag: Lingsi Wei

Speaker:  Lingsi Wei

Title:  Optimal regulation of credit default swaps

 Abstract:  This paper studies the optimal regulation of credit default swaps (CDS) in a binary economy with incomplete markets and collateral-constrained lending. The planner selects between the only two possible types of equilibria—one in which all agents hold positive amounts of the riskless asset (interior) and one in which some agents hold none (corner). We show that the interior equilibrium leads to higher social welfare. These findings provide theoretical support for regulatory approaches that restrict uncovered CDS trading, such as those adopted by the European Union, in contrast to the unregulated treatment in the United States.