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Hedging with Credit Derivatives and its Strategic Role in Banking Competition

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Author Info
Thilo Pausch () (University of Augsburg, Department of Economics)
Gerhard Schweimayer () (University of Augsburg, Department of Economics)

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Abstract

The tremendous growth of markets for credit derivatives since the mid 1990's has raised questions regarding the role of these instruments in the banking industry which is heavily exposed to credit risk. However, while recent literature mainly focused on pricing and optimal decisions regarding volumes of credit derivatives the present paper centers the strategic role of these instruments in the competition between banking firms. We use a duopolistic version of the industrial organization approach to banking to find out that credit derivatives may influence banking competition. For this result to hold observability of the volume of credit derivatives held by banks is not necessary.

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Publisher Info
Paper provided by Universitaet Augsburg, Institute for Economics in its series Discussion Paper Series with number 260.

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Date of creation: Mar 2004
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Handle: RePEc:aug:augsbe:0260

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Related research
Keywords: bank; risk; duopoly; hedging;

Other versions of this item:

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D40 - Microeconomics - - Market Structure and Pricing - - - General
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
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  1. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-58, December. [Downloadable!] (restricted)
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  2. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x.
  3. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June. [Downloadable!] (restricted)
  4. Udo Broll & Gerhard Schweimayer & Peter Welzel, 2003. "Managing Credit Risk with Credit and Macro Derivatives," Discussion Paper Series 252, Universitaet Augsburg, Institute for Economics. [Downloadable!]
    Other versions:
  5. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January. [Downloadable!] (restricted)
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  6. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-38, May. [Downloadable!] (restricted)
  7. Hughes, John S. & Kao, Jennifer L., 1997. "Strategic forward contracting and observability," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 121-133, November. [Downloadable!] (restricted)
  8. Thilo Pausch & Peter Welzel, 2002. "Credit Risk and the Role of Capital Adequacy Regulation," Discussion Paper Series 224, Universitaet Augsburg, Institute for Economics. [Downloadable!]
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