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Has the CDS Market Lowered the Cost of Corporate Debt?Adam B. AshcraftFederal Reserve Bank of New York João A. C. SantosFederal Reserve Bank of New York September 22, 2009 Journal of Monetary Economics, Vol. 56, No. 4, 2009 Abstract: Many have claimed that credit default swaps (CDSs) have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors. This paper evaluates the impact that the onset of CDS trading has on the spreads that underlying firms pay to raise funding in the corporate bond and syndicated loan markets. Employing a range of methodologies, we fail to find evidence that the onset of CDS trading lowers the cost of debt financing for the average borrower. Further, we uncover economically significant adverse effects on risky and informationally opaque firms.
Keywords: Credit default swaps, loan spreads, credit spreads JEL Classification: G24, G32 Accepted Paper SeriesDate posted: September 23, 2009Suggested CitationContact Information
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