Credit default swap and two-sided moral hazard

Yaxian Gong

Finance Research Letters, 2020, vol. 34, issue C

Abstract: We consider the moral hazard incentives of the CDS (Credit Default Swap) buyer and seller simultaneously and show that the CDS trading raises both the seller and buyer’s moral hazard incentive compared with the situation without the CDS trading. Moreover, we demonstrate that the effects of strengthening the capital requirement with CDS are distinct from the circumstance without the CDS trading, which should be taken into account in the capital regulation.

Keywords: Credit default swap; Two-sided moral hazard; Capital requirement (search for similar items in EconPapers)
JEL-codes: D82 G22 G23 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319301965

DOI: 10.1016/j.frl.2019.08.002

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