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Credit Derivatives, Disintermediation, and Investment Decisions

Alan D. Morrison
The Journal of Business
Vol. 78, No. 2 (March 2005), pp. 621-648
DOI: 10.1086/427641
Stable URL: http://www.jstor.org/stable/10.1086/427641
Page Count: 28
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Abstract

The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that, when entrepreneurs rely on 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 engage in second‐best behavior. 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.

Notes and References

This item contains 45 references.

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