Isenberg finance professor Mila Getmansky Sherman and two coauthors have received the Chartered Financial Analyst (CFA) Institute’s* premier honor—its 2016 Graham and Dodd Award for Excellence—for their journal article, “Interconnectedness of the CDS Market.” The paper, which appeared in the July/August 2016 issue of the Financial Analysts Journal, ** deploys a network-based approach in exploring interconnectedness between dealers and nondealers in the credit default swaps (CDS) market. Credit default swaps tied to mortgage-infused collateralized debt obligations were key culprits in the 2007-8 financial crisis.
The honored paper has considerable value because it “speaks directly to systematic risk, one of the biggest issues that financial markets face,” observes the journal’s managing editor, Barbara Petitt. The authors’ network-based approach, she continued, “helps assess the stability of the CDS market and potential contagion among market participants.”
To that end, the authors found considerable interconnectivity among major market participants. That bears relevance for assessing potential contagion, they noted, because risk is transmitted across market participants and affects the stability of the system.
The authors cautioned that risk to counterparties (i.e., central participants that clear the CDS contracts) prescribed in Dodd-Frank regulations will remain concerns owing to long-term characteristics of CDS contracts.
Professor Sherman and her coauthors all worked at the U.S. Securities and Exchange Commission when they wrote the current article. “For me, working at the SEC was terrific,” notes Getmansky Sherman. “It guided my research and teaching, and gave me opportunities to meet with wonderful, knowledgeable colleagues and establish new research collaborations. It also gave me access to excellent data and opportunities to sift through research questions at the forefront of the current regulatory agenda. At the SEC,” she continued, “you have access to lots of expertise on regulation and specific subjects (CDS, money markets, funds, etc.). You’re exposed to nuances of legal interpretation and you learn how to participate in rule making. Without question, those valuable interactions helped me to integrate theory and practice into my own research.”
*The Chartered Financial Analyst Institute represents 146,000 members in 160 countries—most of them investment professionals.