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Credit default swaps and risk-shifting


  • Campello, Murillo
  • Matta, Rafael


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.

Suggested Citation

  • Campello, Murillo & Matta, Rafael, 2012. "Credit default swaps and risk-shifting," Economics Letters, Elsevier, vol. 117(3), pages 639-641.
  • Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:639-641 DOI: 10.1016/j.econlet.2012.08.013

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    References listed on IDEAS

    1. 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.
    2. Patrick Bolton & Martin Oehmke, 2011. "Credit Default Swaps and the Empty Creditor Problem," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2617-2655.
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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.
    2. Stefano Colonnello & Matthias Efing & Francesca Zucchi, 2016. "Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading," Swiss Finance Institute Research Paper Series 16-17, Swiss Finance Institute, revised Jun 2016.
    3. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    4. repec:eee:moneco:v:90:y:2017:i:c:p:50-63 is not listed on IDEAS

    More about this item


    CDS; Risk-shifting; Financing efficiency; Regulation;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis


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