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Credit Derivatives, Disintermediation, and Investment Decisions

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  • Alan D. Morrison

    (Said Business School, University of Oxford)

Abstract

The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that, when entrepreneurs rely on the certification value of bank debt to obtain cheap bond market finance, the existence of a credit derivatives market may cause them to issue sub-investment grade bonds instead and engage in second-best behavior. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most effectively countered by the introduction of reporting requirements for credit derivatives.

Suggested Citation

  • Alan D. Morrison, 2005. "Credit Derivatives, Disintermediation, and Investment Decisions," The Journal of Business, University of Chicago Press, vol. 78(2), pages 621-648, March.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:621-648
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