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/lp/american-economic-association/credit-market-speculation-and-the-cost-of-capital-cbU5njFAdz
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- Publisher
- American Economic Association
- Copyright
- Copyright © 2014 by the American Economic Association
- Subject
- Articles
- ISSN
- 1945-7685
- eISSN
- 1945-7685
- DOI
- 10.1257/mic.6.4.1
- Publisher site
- See Article on Publisher Site
Abstract
Abstract We examine the effects of speculation using credit derivatives on the cost of debt and the likelihood of default. The availability of credit default swaps induces investors who are optimistic about borrower revenues to sell protection instead of buying bonds. This benefits borrowers if protection can only be bought with an insurable interest, but can increase the cost of debt and crowd out productive lending if protection can be purchased as a bet on default. We also show that the possibility of speculation on default may cause multiple equilibria and exacerbate the problem of rollover risk. (JEL D86, G13, G31 )
Journal
American Economic Journal: Microeconomics – American Economic Association
Published: Nov 1, 2014