Empirical Study on the Role of CDS (Credit Default Swaps) -With Special Reference to Global Financial Crisis

The paper attempts to examine the role of CDS (Credit Default Swaps) in the global financial crisis and determining which factor play a major role leading to the global meltdown. It is empirically foundbased on the perception of financial experts and using appropriate statistical analysis such as factor analysis, parametric t-test and regression analysis. The Credit Default Swaps (CDS) is an innovative credit derivative instrument that became extremely popular in the last decade and is regarded by financial experts as one of the reasons for the occurrence of global financial crisis in 2007–2008. According to Bank for International Settlement (BIS) the total notional amount of CDS was $6 trillion in 2004; it is increased to $57 trillion by June 2008. There were several factors that caused the crisis which primarily started with the US subprime mortgage crisis in August 2007. An innovative and complex financial instrument was one of the reasons for creating a vulnerable and fragile financial system that cracked in the backdrop of asset bubble. The trading of innovative over-thecounter financial products, particularly those aimed at transferring credit risk, notably Credit Default Swaps(CDS)and Collateralized Debt Obligations(CDOs), expanded very rapidly and the financial institutions failed to properly manage and monitor the risks associated with such financial instruments that resulted in precipitating the crisis.