Credit default swaps and risk-shifting
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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References listed on IDEAS
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- 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.
- Patrick Bolton & Martin Oehmke, 2010.
"Credit Default Swaps and the Empty Creditor Problem,"
NBER Working Papers
15999, National Bureau of Economic Research, Inc.
- 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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