Credit Derivatives Amplified And Diffusion Effect Analysis Of The Financial Crisis

The global financial crisis erupted in2007has had painful repercussions until now. The subprime mortgage crisis came up with some new features compared with the financial crisis before this crisis, which originated in the U.S. real estate market caused by the sub-prime mortgage solvency crisis, but then developed into a major earthquake in the financial markets, even the real economy was also seriously stricken, and eventually across the ocean, led the global financial and economic tsunami.The losses brought about by the U.S. subprime mortgage crisis on the global economic have far exceeded the subprime loans and securities losses. Finally this relatively small scale subprime mortgage crisis had triggered a large-scale global economic crisis. This will lead us to think about why the credit derivatives can act as the leverage of the subprime mortgage crisis to leverage the global economic crisis? And what is the mechanism of the transfer and amplification of this financial risk?Credit derivatives could amplify the financial crisis. On the one hand, it increased the total credit risk of the financial market; on the other hand, it increased the leverage risk of the financial markets, and thus created the conditions for asset bubbles and excess liquidity. As a result of the model risk, rating risk, counterparty risk of the credit derivatives, asymmetric information and the absence of regulation in the credit derivatives market, the risk of the financial system was substantially enlarged. Credit derivatives were the vector of the spread of financial risk between various financial markets and institutions. On the one hand, it made the financial risk spread from the credit markets to the capital markets and other financial markets; on the other hand, the financial risk from the capital market reacted in the credit markets and the currency markets. At the same time, credit derivatives were the carrier on which the financial risk was spread between various countries and regions. Thus, credit derivatives had spreading effect on the financial crisis. In this paper, the Merton model and the Vasicek asymptotic single factor model were used to prove that by lowering lending standards, the U.S. mortgage institutions eventually enlarged the investment risks of credit derivatives. This paper further developed the VAR model and used the impulse response function to analyze how the financial crisis spread in the money market, stock markets and commodity markets. Finally, this paper verified the amplification and transfer of financial risk by asset securitization and credit derivatives during the sub-prime crisis.Credit derivatives are double-edged sword, only to get the healthy development under prudential supervision. The following needs to be done:to strengthen the supervision and information disclosure on the quality of the underlying asset credit derivatives; to strengthen the supervision of rating agencies; to control the leverage risk of financial institutions; to strengthen the information disclosure of the credit derivatives; to promote the credit derivatives to be traded in the security exchange market instead of the OTC market. To develop a healthy market for credit derivatives in China, we should do the work of market building, institution building, investor-building and institutional building.