TY - JOUR T1 - Inventory Effects, the Winner’s Curse, and Bid Shading in Credit Default Swap Auction Outcomes JF - The Journal of Derivatives SP - 36 LP - 52 DO - 10.3905/jod.2015.23.2.036 VL - 23 IS - 2 AU - Sudip Gupta AU - Rangarajan K. Sundaram Y1 - 2015/11/30 UR - https://pm-research.com/content/23/2/36.abstract N2 - This article studies bidding behavior in the novel and complex auctions that, since 2005, have determined recovery rates in the multi-trillion dollar credit default swap (CDS) market. We find that bids are substantially influenced by inventory effects (bidders’ CDS positions entering the auction), market illiquidity, and “winners curse” considerations. The economically and statistically significant extent of “bid-shading” induced by these factors explains why auction prices deviate significantly (on average >16%) from pre- and post-auction market prices for the same instruments even while auction-generated information is significantly informative for post-auction market price formation.TOPICS: Credit default swaps, statistical methods ER -