Young Economics.

Finding Future in the Market

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I read a great post on “credit default swaps” (CDS) this morning.  A CDS is basically a form of insurance on a bond.  The seller agrees to pay the holder a lump sum of money in case of non-performance in exchange for some interest premium back.  So inside the CDS market, companies with  CDS’s demanding higher interest payments are likely in worse shape than their counterparts.

The interesting thing is that this market will price trouble into a company before the mainstream media has any notion of what’s going on.  Here is an example from the original post using Iceland.  The article also shows examples from AIG and Bear Sterns.  Check it out at this link.

“In the middle of 2007, Iceland’s CDS were priced below 10 bp. They spent most of July and August this year in the high 200s, passed 300 in mid-September, and reached 395 bp on Friday, September 26. Iceland only reached the attention of the mainstream media on Monday, September 29 (Times article the next day, in which Iceland barely got a mention).”

I wonder if this implies assymetric information in the market.  The largest holders of corporate and national debt are generally corporate and national players.  If you are one big bank lending to another, do you have access to a source of information not everyone else has? Say, the bank directors are golfing buddies.  Or else is all the information out there and those with a vested interest take more time to study it and pick up the trends first.

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Written by jk

March 6, 2009 at 9:16 am

Posted in Economic Stuff

Tagged with ,

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