Credit Default Swaps and Risk-Shifting

Abstract

Credit default swaps (CDSs) are thought to ease borrowing by protecting lenders against default. This paper develops a model of the demand for CDS when borrowers choose the riskiness of investment and verification is imperfect. The model shows that CDSs may lead to risk-shifting, increasing the probability of default. Our model provides new insights on the role of CDS during the recent financial crisis. JEL Classification Numbers: G33, D86, D61.

Cite this paper

@inproceedings{Matta2017CreditDS, title={Credit Default Swaps and Risk-Shifting}, author={Martina Matta and Murillo Campello and Rafael Matta}, year={2017} }