Treating Uncertainty as Risk: The Credit Default Swap and the Paradox of Derivatives
The credit default swap (CDS) is implicated in the global financial crises because a vast market for securities collateralized by subprime mortgages and consumer debt could not have materialized if hedge funds and other holders of these instruments lacked a means of hedging default "risk."...
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| Veröffentlicht in: | Journal of economic issues 2012-06, Vol.46 (2), p.303-312 |
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| container_title | Journal of economic issues |
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| creator | Brown, Christopher Hao, Cheng |
| description | The credit default swap (CDS) is implicated in the global financial crises because a vast market for securities collateralized by subprime mortgages and consumer debt could not have materialized if hedge funds and other holders of these instruments lacked a means of hedging default "risk." The argument is made that the CDS is an inherently defective concept because it is based on the assumption that future states of the economy are subject to probabilistic risk as opposed to uncertainty in the Keynes-Knight-Shackle-Davidson sense. The CDS also manifests the paradox of derivatives. By enabling individual money managers to safely increase leverage, it causes a system-wide buildup of leverage and financial fragility. |
| doi_str_mv | 10.2753/JEI0021-3624460205 |
| format | Article |
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The argument is made that the CDS is an inherently defective concept because it is based on the assumption that future states of the economy are subject to probabilistic risk as opposed to uncertainty in the Keynes-Knight-Shackle-Davidson sense. The CDS also manifests the paradox of derivatives. 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The argument is made that the CDS is an inherently defective concept because it is based on the assumption that future states of the economy are subject to probabilistic risk as opposed to uncertainty in the Keynes-Knight-Shackle-Davidson sense. The CDS also manifests the paradox of derivatives. By enabling individual money managers to safely increase leverage, it causes a system-wide buildup of leverage and financial fragility.</description><subject>Bankruptcy</subject><subject>Collateralized debt obligations</subject><subject>Consumer credit</subject><subject>Credit</subject><subject>Credit default swaps</subject><subject>Credit insurance</subject><subject>Credit market</subject><subject>Credit risk</subject><subject>Debt</subject><subject>Debt service</subject><subject>Default</subject><subject>Default insurance</subject><subject>Derivatives</subject><subject>Derivatives (Financial instruments)</subject><subject>Economic crisis</subject><subject>Economic forecasts</subject><subject>Economic policy</subject><subject>Economic theory</subject><subject>Economic uncertainty</subject><subject>Efficient markets</subject><subject>Financial crisis</subject><subject>Financial leverage</subject><subject>Forecasts and trends</subject><subject>Hedge funds</subject><subject>Hedging</subject><subject>Insurance regulation</subject><subject>International finance</subject><subject>Investment advisors</subject><subject>Keynesian theory</subject><subject>Liens</subject><subject>Market trend/market analysis</subject><subject>Markets</subject><subject>Money</subject><subject>Mortgage loans</subject><subject>Mortgages</subject><subject>Personal debt</subject><subject>Probability</subject><subject>Risk</subject><subject>risk and uncertainty</subject><subject>Securities</subject><subject>Student loans</subject><subject>Studies</subject><subject>Time series</subject><subject>Uncertainty</subject><subject>Uniform Commercial Code-US</subject><issn>0021-3624</issn><issn>1946-326X</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2012</creationdate><recordtype>article</recordtype><sourceid>N95</sourceid><sourceid>8G5</sourceid><sourceid>ABUWG</sourceid><sourceid>AFKRA</sourceid><sourceid>AZQEC</sourceid><sourceid>BEC</sourceid><sourceid>BENPR</sourceid><sourceid>CCPQU</sourceid><sourceid>DWQXO</sourceid><sourceid>GNUQQ</sourceid><sourceid>GUQSH</sourceid><sourceid>M2O</sourceid><sourceid>7TQ</sourceid><recordid>eNqNkuFrEzEYxg9RsE7_AUE48IvCbia5S3In-GF2s1YKE-3AbyGXe--Wek1qktvW_96Uls1KmRJIIM_veZK8eZPkJUYnhNP83ZfzKUIEZzkjRcEQQfRRMsJVwbKcsB-Pk9Gd-jR55v0CIUQLSkfJfO5ABm269NIocEFqE9ap9Ok37X--T-dXkI4dNDqkZ9DKoQ_p9xu5SqVp0hC1r9LJxt6mto2609cx6hr88-RJK3sPL3brUXL56Xw-_pzNLibT8eksU5yXIcO0ViXBnGOEG0mYophUWNWENbwFhFldV4qxkiDWNpwCkJJDU-CyxnVb1io_St5sc1fO_hrAB7HUXkHfSwN28AKTskC8jKH_RhHhjDPG8oi-_gtd2MGZ-JBI4QpRVKLqnupkD0Kb1gYn1SZUnJKKUY5ZtaGyA1QHBpzsrYFWx-09_uQAH0cDS60OGt7uGSIT4DZ0cvBeTD9O_pstJ7OHLr5jle176EDEbxxf7PPHf_D14LUBHyevu6vgt0fs4WSLK2e9d9CKldNL6daxxGLT0WLX0eK-o6Pp1da08MG6OweJLU4RRlH_sNU3dXNLeWNd34gg1711rZNGaS_yB_J_A8Gt_m4</recordid><startdate>20120601</startdate><enddate>20120601</enddate><creator>Brown, Christopher</creator><creator>Hao, Cheng</creator><general>Routledge</general><general>M.E. 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| fulltext | fulltext |
| identifier | ISSN: 0021-3624 |
| ispartof | Journal of economic issues, 2012-06, Vol.46 (2), p.303-312 |
| issn | 0021-3624 1946-326X |
| language | eng |
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| source | PAIS Index; EBSCOhost Business Source Complete; JSTOR Archive Collection A-Z Listing |
| subjects | Bankruptcy Collateralized debt obligations Consumer credit Credit Credit default swaps Credit insurance Credit market Credit risk Debt Debt service Default Default insurance Derivatives Derivatives (Financial instruments) Economic crisis Economic forecasts Economic policy Economic theory Economic uncertainty Efficient markets Financial crisis Financial leverage Forecasts and trends Hedge funds Hedging Insurance regulation International finance Investment advisors Keynesian theory Liens Market trend/market analysis Markets Money Mortgage loans Mortgages Personal debt Probability Risk risk and uncertainty Securities Student loans Studies Time series Uncertainty Uniform Commercial Code-US |
| title | Treating Uncertainty as Risk: The Credit Default Swap and the Paradox of Derivatives |
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