Credit Derivatives, Disintermediation and Investment Decisions

Oxford Financial Research Centre Working Paper 2001-FE-01

31 Pages Posted: 2 Jun 2001

See all articles by Alan D. Morrison

Alan D. Morrison

University of Oxford - Said Business School; University of Oxford - Merton College

Multiple version iconThere are 2 versions of this paper

Date Written: May 2001

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 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.

Keywords: Credit derivative, monitoring, junk bonds, debt finance, capital structure.

JEL Classification: G24, G28, G34

Suggested Citation

Morrison, Alan, Credit Derivatives, Disintermediation and Investment Decisions (May 2001). Oxford Financial Research Centre Working Paper 2001-FE-01, Available at SSRN: https://ssrn.com/abstract=270269 or http://dx.doi.org/10.2139/ssrn.270269

Alan Morrison (Contact Author)

University of Oxford - Said Business School ( email )

Department of Finance
Park End Street
Oxford OX1 1HP
United Kingdom
+44 18 6527 6343 (Phone)
+44 18 6527 6310 (Fax)

University of Oxford - Merton College

Merton Street
Oxford OX1 4JD
United Kingdom
+44 18 6527 6343 (Phone)

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