Credit default swaps and risk-shifting

Murillo Campello and Rafael Matta

Economics Letters, 2012, vol. 117, issue 3, 639-641

Abstract: 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.

Keywords: CDS; Risk-shifting; Financing efficiency; Regulation (search for similar items in EconPapers)
JEL-codes: D61 D86 G33 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:117:y:2012:i:3:p:639-641

DOI: 10.1016/j.econlet.2012.08.013

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