Credit Derivatives, Disintermediation and Investment Decisions
Alan D. Morrison
University of Oxford - Said Business School; University of Oxford - Merton College
Oxford Financial Research Centre Working Paper 2001-FE-01
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 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 to engage in second-best behaviour. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most effectively countered by the introduction of reporting requirements for credit derivatives.
Number of Pages in PDF File: 31
Keywords: Credit derivative, monitoring, junk bonds, debt finance, capital structure.
JEL Classification: G24, G28, G34working papers series
Date posted: June 2, 2001
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