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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Year of publication:	2012
Authors:	Campello, Murillo ; Matta, Rafael
Published in:	Economics Letters. - Elsevier, ISSN 0165-1765. - Vol. 117.2012, 3, p. 639-641
Publisher:	Elsevier
Subject:	CDS \| Risk-shifting \| Financing efficiency \| Regulation

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Type of publication:	Article
Classification:	G33 - Bankruptcy; Liquidation ; D86 - Economics of Contract: Theory ; D61 - Allocative Efficiency; Cost-Benefit Analysis
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10010594164