The Effect of Credit Derivatives on Financial Stability
Abstract
Due to the recent financial turmoil, questions have been raised about the impact of
complex financial products, like credit derivatives, on financial stability. The academic
literature however does not provide a clear answer to this question. This paper empirically
links the stability of the financial sector to the use of credit derivatives for the main constituents
of the European financial sector. We find that the use of credit derivatives increases the
probability of default and thus reduces the overall financial sector stability. In addition,
we find evidence that this relationship is progressive and economically meaningful.
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Copyright (c) 2016 Richard van Ofwegen, Willem F.C. Verschoor, Remco C.J. Zwinkels
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