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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 upon the certification value of bank debts to obtain cheap bond market insurance, the existance of a credit derivatives market may cause them to issue sub-investment grade bonds instead, and to engage in second-best behaviour. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most ef...

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Publication status:
Published

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Publisher:
University of Oxford
Series:
Department of Economics Discussion Paper Series
Publication date:
2001-05-01
Paper number:
2001-FE-01
Keywords:
Pubs id:
679203
Local pid:
pubs:679203
Deposit date:
2020-12-14

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