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Credit default swaps and risk-shifting

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  • Campello, Murillo
  • Matta, Rafael

Abstract

Credit default swaps (CDSs) are thought to ease borrowing by protecting lenders against default. This paper develops a model of the demand for CDS when borrowers choose the riskiness of investment and verification is imperfect. The model shows that CDSs may lead to risk-shifting, increasing the probability of default. Our model provides new insights into the role of CDS during the recent financial crisis.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 117 (2012)
Issue (Month): 3 ()
Pages: 639-641

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Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:639-641

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: CDS; Risk-shifting; Financing efficiency; Regulation;

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References

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  1. Patrick Bolton & Martin Oehmke, 2010. "Credit Default Swaps and the Empty Creditor Problem," NBER Working Papers 15999, National Bureau of Economic Research, Inc.
  2. Henry T. C. Hu & Bernard Black, 2008. "Debt, Equity and Hybrid Decoupling: Governance and Systemic Risk Implications," European Financial Management, European Financial Management Association, vol. 14(4), pages 663-709.
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Cited by:
  1. Arping, Stefan, 2014. "Credit protection and lending relationships," Journal of Financial Stability, Elsevier, vol. 10(C), pages 7-19.

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