- Investment Risk, CDS Insurance and Firm Financing
- Number of pages
- Cornell University
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
We develop a model in which investment risk drives the demand for CDS insurance. We show that CDS overinsurance (insurance in excess of renegotiation proceeds) is procyclical and allows for greater financing of firms with positive NPV projects. In bad times, CDS overinsurance triggers the early liquidation of firms with low continuation values. Our analysis explains the benefits of CDS contracting over economic cycles and reconciles evidence showing that CDSs are most beneficial for firms that are safer and have higher continuation values. The model generates a number of empirical predictions and provides insights on the regulation of CDS markets.
- go to publisher's site
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.