We analyze the role of transaction costs in risk transfer markets. For example, when these markets are in their infancy, they are characterized by few contracts and high transaction costs. In this case, we show that only highly risk-averse buyers (e.g., hedgers) exist in the market alongside...

In traditional economic models of insurance, sellers typically employ a non-linear pricing scheme to elicit type information from buyers. In financial insurance contracts, such a policy is not possible since contracts are non-exclusive. In addition, counterparty risk in financial contracts can...

What market features of financial risk transfer exacerbate counterparty risk? To analyze this, we formulate a model which elucidates important differences between financial risk transfer and traditional insurance, using the example of Credit Default Swaps (CDS). We allow for (heterogeneous)...