Economics, Econometrics and Finance
8 years ago

Bond funds' risky CDS practices linked to lower returns during crisis.

SSRN Electronic Journal
Counterparty Risk in Bond Mutual Funds: Evidence from Credit Default Swaps Positions

Paper Summary

Bond mutual funds used credit default swaps (CDS) more during 2004-2009, especially when it was cheaper. They used CDS to trade bonds less and avoided buying protection during the financial crisis. Funds closed risky CDS positions and sold protection to struggling banks during the crisis. Funds that used CDS had riskier portfolios and lower returns during the crisis.

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