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Credit default swap and two-sided moral hazard

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  • Gong, Yaxian

Abstract

We consider the moral hazard incentives of the CDS (Credit Default Swap) buyer and seller simultaneously and show that the CDS trading raises both the seller and buyer’s moral hazard incentive compared with the situation without the CDS trading. Moreover, we demonstrate that the effects of strengthening the capital requirement with CDS are distinct from the circumstance without the CDS trading, which should be taken into account in the capital regulation.

Suggested Citation

  • Gong, Yaxian, 2020. "Credit default swap and two-sided moral hazard," Finance Research Letters, Elsevier, vol. 34(C).
    • Handle: RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319301965
    DOI: 10.1016/j.frl.2019.08.002
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    More about this item

    Keywords

    Credit default swap; Two-sided moral hazard; Capital requirement;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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