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Credit Derivatives, Disintermediation, and Investment Decisions

Abstract:

The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that, when entrepreneurs rely on the certification value of bank debt to obtain cheap bond market finance, the existence of a credit derivatives market may cause them to issue sub-investment grade bonds instead and engage in second-best behavior. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most effectively...

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Publication date:
2005-01-01
UUID:
uuid:e755eb2e-1240-4ab9-8197-9ea4f4a3cd6a
Local pid:
oai:eureka.sbs.ox.ac.uk:1685
Deposit date:
2011-12-13

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