Abstract

http://ssrn.com/abstract=1770066
 
 

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Credit Default Swaps, Firm Financing and the Economy


Murillo Campello


Cornell University; National Bureau of Economic Research (NBER)

Rafael Matta


University of Amsterdam - Finance Group

August 30, 2013


Abstract:     
This paper develops a model of CDS demand when investment is subject to economic fluctuations and verification is imperfect. We show that CDS overinsurance (insurance in excess of renegotiation proceeds) is procyclical and allows for greater financing of firms with positive NPV projects. In bad times, CDS overinsurance triggers the early liquidation of firms with low continuation values. Our analysis explains the optimality of CDS contracting and reconciles evidence showing that CDSs are most beneficial for firms that are safer and have higher continuation values. The model generates a number of empirical predictions and provides insights on the regulation of CDS markets.

Number of Pages in PDF File: 40

Keywords: CDS, Bankruptcy, Bargaining, Financing Efficiency, Regulation

JEL Classification: G33, D86, D61

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Date posted: February 28, 2011 ; Last revised: September 16, 2013

Suggested Citation

Campello, Murillo and Matta, Rafael, Credit Default Swaps, Firm Financing and the Economy (August 30, 2013). Available at SSRN: http://ssrn.com/abstract=1770066 or http://dx.doi.org/10.2139/ssrn.1770066

Contact Information

Murillo Campello
Cornell University ( email )
114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
Rafael Matta (Contact Author)
University of Amsterdam - Finance Group ( email )
Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
HOME PAGE: http://www1.fee.uva.nl/pp/rmatta/
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