Financial Innovations, Credit Default Swaps, and Syndicated Loans

2011 ◽  
Author(s):  
Wei-Ling Song
Keyword(s):  
Credit Default Swaps ◽  
Syndicated Loans ◽  
Financial Innovations ◽  
Credit Default

scholarly journals Financial Innovation, Collateral, and Investment

2016 ◽  
Vol 8 (1) ◽  
pp. 242-284 ◽  
Author(s):  
Ana Fostel ◽  
John Geanakoplos
Keyword(s):  
Cash Flow ◽  
Competitive Equilibrium ◽  
Financial Innovation ◽  
Credit Default Swaps ◽  
Flow Problems ◽  
Financial Innovations ◽  
Credit Default

Financial innovations that change how promises are collateralized affect prices and investment, even in the absence of any change in fundamentals. In C-models, the ability to leverage an asset always generates overinvestment compared to Arrow-Debreu. Credit Default Swaps always leads to underinvestment with respect to Arrow-Debreu, and in some cases even robustly destroy competitive equilibrium. The need for collateral would seem to cause under-investment. Our analysis illustrates a countervailing force: goods that serve as collateral yield additional services and can therefore be over-valued and over-produced. In models without cash flow problems there is never marginal underinvestment on collateral. (JEL D52, D86, D92, E44, G01, G12, R31)

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