Economics, Econometrics and Finance
2 years ago

Credit Default Swaps Increase Credit Risk and Bankruptcy Likelihood for Firms.

SSRN Electronic Journal
Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk
Hong Kong Institute for Monetary and Financial Research

Paper Summary

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Credit default swaps (CDS) trading can increase the risk of credit rating downgrades and bankruptcy for companies. A study of 901 North American firms showed that after starting CDS trading, the likelihood of financial trouble rose significantly. Companies with more CDS contracts and those with contracts that don't allow restructuring are particularly at risk. Additionally, the number of creditors also goes up after CDS trading starts, making it harder to resolve financial problems.