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...

What market features of Credit Defaults Swaps (CDS) exacerbate counterparty risk? To answer this, we formulate a model which elucidates key differences between these and traditional insurance contracts. First, we allow for insurer insolvency with asymmetric information as to its probability. We...

We provide a tractable model of counterparty risk in an intermediated risk transfer market, and analyze the consequences of this risk being private information. We show that unknown type information can be revealed when large trades are observable; however, the allocation is shown to be...