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Credit Derivatives, Disintermediation and Investment Decisions

  • Alan Morrison
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    The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that when entrepreneurs rely upon the certification value of bank debts to obtain cheap bond market insurance, the existance of a credit derivatives market may cause them to issue sub-investment grade bonds instead, and to engage in second-best behaviour. 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.

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    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2001-FE-01.

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    Date of creation: 01 May 2001
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    Handle: RePEc:oxf:wpaper:2001-fe-01
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    Web page: http://www.economics.ox.ac.uk/
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