Christine Parlour

English

Research Papers in Economics

Has the Development of the structured Credit
Market affected the Cost of Corporate Debt?
Ashcraft and Santos
Nov. 17, 2006What Happened?
• In the 1990s emergence of credit derivatives, the
notational value of which is massive.
• Not the only thing that was happening: also explosive
growth of loan salesIn this paper
• “Has the development of this market been associated with
a reduction in the cost of debt ﬁnancing?”
• Matched samplesM&M
• Three states, {s1,s2,s3} with state prices {π1,π2,π3}
• Suppose the ﬁrm has cash ﬂows of {1,2,3}
• Value of the ﬁrm is determined by the state prices
• No combination of promised payment tomorrow affects the
ﬁrms’ value• Changes in price of debt or equity depending on the value
of the claim, but no change in the sum of the two.
• Suppose someone else offered a contract that pays off in a
particular state =⇒ no effect on the value of the ﬁrm, or on
the value of debt.Why?
• Why did this market arise ?
• What friction or cost was eliminated?Frictions?
• “A ﬁrm that has a trading CDS in essence has given
investors added opportunities to diversify their exposure to
the ﬁrm,”
• If this is true, then investors were undiversiﬁed before =⇒
difﬁcult to understand why?
• Systematic Risk?
• Equity values ⇓ put optionsWhat frictions?
1 Cost to replicate debt contracts suddenly reduced.
2 Cost to access the market? ( relative price of equity
markets would be important)
3 Moral hazard in loans ? (Whole value of the ﬁrm would
have changed)Matched What?
• Corporate has trouble identifying why ﬁrms have particular
capital structure
• Probably difﬁcult to identify what causes changes
• What are the appropriate dimensions along which to match
the samples?
• Very Dangerous to use book/market as a proxy for QSuggestions
• Why should the introduction of the CDS have an effect?
1 Constraint faced by the market that is now relaxed. For
example, a ﬁxed cost of buying corporate bonds
2 Increase in a Constraint faced by the ﬁrms in issuing bonds
(now issued privately)
• A few theory working papers that might be of interest.

Has the development of the structured credit market affected the cost of corporate debt? - comments

http://www.frbsf.org/economics/conferences/0611/Parlour.pdf

Has the development of the structured credit market affected the cost of corporate debt? - comments

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