In sum, the banking sector actively involved in credit derivatives during 2006-2010, both for hedging and for trading. The credit derivative positions the banks held boomed in 2006 and 2007 but decreased in 2008 and 2009. I believe that the decrease in the credit derivative volume is caused by the concern on counterparty credit risk, through the method of trade compression.
Most of the credit derivative positions in the sample were held by JP Morgan Chase, Bank of America and Citigroup over the sample period. Most of their credit derivative positions were for dealing activity, and they largely matched their positions. These banks disclosed more and more information about credit derivatives over time. They also gave comments on the credit market situations and the actions of the industry.
Credit derivatives played an important role in the events happened during the financial crisis. The major effect of credit derivatives is that they are traded over-the-counter, so the failure of a significant counterparty in this market may harm the entire financial system. Further research may be done to explore what role offsetting trade played during the booming period of credit derivatives.
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