Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps

2020 ◽  
Author(s):  
Alexander W. Butler ◽  
Xiang Gao ◽  
Cihan Uzmanoglu
Keyword(s):  
Risk Sharing ◽  
Financial Intermediation ◽  
Financial Innovation ◽  
Credit Default Swaps ◽  
Regulatory Requirements ◽  
Credit Default ◽  
Underwriting Fees

We study the influence of credit default swaps (CDS) trading on the costs of bond intermediation. After CDS initiation, CDS firms pay 12% to 28% (8 to 20 basis points) lower underwriting fees than similar non-CDS firms do. Underwriting fees decline more for riskier issuers and illiquid bonds for which the ability to hedge with CDS is more valuable. In bond offerings, participation by investors facing risk-based regulatory requirements increases after CDS initiation. Our evidence suggests that CDS-driven innovations in risk sharing contribute to the transactional efficiency of the market by reducing the financial intermediation costs of placing bonds. This paper was accepted by Karl Diether, finance.

scholarly journals Financial Innovation, Collateral, and Investment

2016 ◽  
Vol 8 (1) ◽  
pp. 242-284 ◽  
Author(s):  
Ana Fostel ◽  
John Geanakoplos
Keyword(s):  
Cash Flow ◽  
Competitive Equilibrium ◽  
Financial Innovation ◽  
Credit Default Swaps ◽  
Flow Problems ◽  
Financial Innovations ◽  
Credit Default

Financial innovations that change how promises are collateralized affect prices and investment, even in the absence of any change in fundamentals. In C-models, the ability to leverage an asset always generates overinvestment compared to Arrow-Debreu. Credit Default Swaps always leads to underinvestment with respect to Arrow-Debreu, and in some cases even robustly destroy competitive equilibrium. The need for collateral would seem to cause under-investment. Our analysis illustrates a countervailing force: goods that serve as collateral yield additional services and can therefore be over-valued and over-produced. In models without cash flow problems there is never marginal underinvestment on collateral. (JEL D52, D86, D92, E44, G01, G12, R31)

scholarly journals New Rules for Credit Default Swap Trading: Can We Now Follow the Risk?

2014 ◽  
pp. 1-6
Author(s):  
John B. Carlson ◽  
Margaret Jacobson
Keyword(s):  
Financial Crisis ◽  
Financial Innovation ◽  
Credit Default Swap ◽  
Credit Default Swaps ◽  
Access To Information ◽  
Over The Counter ◽  
Market Participants ◽  
Credit Default ◽  
Default Swap

Credit default swaps, a useful but complex financial innovation of the 1990s, were traded over the counter before the financial crisis. Because of this infrastructure, a very opaque market emerged, and from it, the severe risk imbalances that helped fuel the crisis. Reforms are now being worked out and put in place which will move the majority of credit default swaps transactions to more transparent exchanges. Market participants will be able to see pre-trade and post-trade pricing, and regulators will have access to information that will allow them to monitor risk concentrations as they develop and take actions before they become of systemic concern.

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