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Working Paper
Credit Default Swaps in General Equilibrium: Spillovers, Credit Spreads, and Endogenous Default
This paper highlights two new effects of credit default swap markets (CDS) in a general equilibrium setting. First, when firms' cash flows are correlated, CDSs impact the cost of capital{credit spreads{and investment for all firms, even those that are not CDS reference entities. Second, when firms internalize the credit spread changes, the incentive to issue safe rather than risky bonds is fundamentally altered. Issuing safe debt requires a transfer of profits from good states to bad states to ensure full repayment. Alternatively, issuing risky bonds maximizes profits in good states at the ...
Working Paper
Mixed Signals: Investment Distortions with Adverse Selection
We study how adverse selection distorts equilibrium investment allocations in a Walrasian credit market with two-sided heterogeneity. Representative investor and partial equilibrium economies are special cases where investment allocations are distorted above perfect information allocations. By contrast, the general setting features a pecuniary externality that leads to trade and investment allocations below perfect information levels. The degree of heterogeneity between informed agents' type governs the direction of the distortion. Moreover, contracts that complete markets dampen the impact ...
Discussion Paper
Private Firm Repayment Vulnerabilities and Adverse Economic Conditions
This note extends to private firms an analysis of the impact of macroeconomic conditions on corporate interest coverage ratios (ICRs), a measure of repayment risk developed by McCoy et al. (2020). Our analysis is complimentary. We utilize unique data on private-firm balance sheets obtained through the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process and evaluate the impact of updated and new macroeconomic projections on the distribution and path of corporate interest coverage ratios.
Discussion Paper
Private Firm Repayment Vulnerabilities and Adverse Economic Conditions
This note extends to private firms an analysis of the impact of macroeconomic conditions on corporate interest coverage ratios (ICRs), a measure of repayment risk developed by McCoy et al. (2020). Our analysis is complimentary. We utilize unique data on private-firm balance sheets obtained through the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process and evaluate the impact of updated and new macroeconomic projections on the distribution and path of corporate interest coverage ratios.
Discussion Paper
A Look Under the Hood How Banks Use Credit Default Swaps
This note uses a unique dataset that matches banks' securities and loan portfolios to bank credit derivative transactions to characterize the basic features of how the largest banks in the U.S. use the single name CDS market in their investment portfolios.
Discussion Paper
Private Firm Repayment Vulnerabilities and Adverse Economic Conditions
This note extends to private firms an analysis of the impact of macroeconomic conditions on corporate interest coverage ratios (ICRs), a measure of repayment risk developed by McCoy et al. (2020). Our analysis is complimentary. We utilize unique data on private-firm balance sheets obtained through the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process and evaluate the impact of updated and new macroeconomic projections on the distribution and path of corporate interest coverage ratios.
Working Paper
Moldy Lemons and Market Shutdowns
This paper studies competitive market shutdowns due to adverse selection, where sellers post nonexclusive menus of contracts. We first show that the presence of the worst type of agents (moldy lemons) causes markets to fail only if their mass is sufficiently large. We then show that a small mass of moldy lemons can lead to a large cascade of exits when buyers possess outside options. Our results suggest a parsimonious way of generating sudden market shutdowns without relying on institutional details or imposing additional structure on the model. Thus, the simple insights on the properties of ...
Discussion Paper
Private Firm Repayment Vulnerabilities and Adverse Economic Conditions
This note extends to private firms an analysis of the impact of macroeconomic conditions on corporate interest coverage ratios (ICRs), a measure of repayment risk developed by McCoy et al. (2020). Our analysis is complimentary. We utilize unique data on private-firm balance sheets obtained through the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process and evaluate the impact of updated and new macroeconomic projections on the distribution and path of corporate interest coverage ratios.
Discussion Paper
Private Firm Repayment Vulnerabilities and Adverse Economic Conditions
This note extends to private firms an analysis of the impact of macroeconomic conditions on corporate interest coverage ratios (ICRs), a measure of repayment risk developed by McCoy et al. (2020). Our analysis is complimentary. We utilize unique data on private-firm balance sheets obtained through the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process and evaluate the impact of updated and new macroeconomic projections on the distribution and path of corporate interest coverage ratios.
Discussion Paper
Private Firm Repayment Vulnerabilities and Adverse Economic Conditions
This note extends to private firms an analysis of the impact of macroeconomic conditions on corporate interest coverage ratios (ICRs), a measure of repayment risk developed by McCoy et al. (2020). Our analysis is complimentary. We utilize unique data on private-firm balance sheets obtained through the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process and evaluate the impact of updated and new macroeconomic projections on the distribution and path of corporate interest coverage ratios.