Thesis (Ph. D.)--UCLA, 2009. / Vita. Description based on print version record. Includes bibliographical references (leaves 160-165).

In recent years, concerns have been raised about the real effects of credit default swaps (CDS) on the economy. Different from the hitherto accepted view that derivatives are redundant, CDS may affect the credit risk and strategic liquidity decision of the reference entities. In this dissertation, I use a unique, comprehensive sample covering 901 CDS introductions on North American corporate issuers, between June 1997 and April 2009, to address these questions. In chapter 2, I investigate whether CDS trading increases the credit risk of the reference entities. I find that the probability of both a credit rating downgrade and bankruptcy increase after the inception of CDS trading. This finding is robust to controlling for the endogeneity of CDS trading in difference-in-difference analysis, propensity score matching, and treatment regressions with instruments. In further corroboration of our basic results, I explore the mechanism behind the increased credit risk after CDS trading, and show that firms with relatively larger amounts of CDS contracts outstanding, and those with more “no restructuring” contracts, are more adversely affected by CDS trading. In chapter 3, I further investigate the effect of CDS on corporate cash holding policies. U.S. firms are holding more cash than at any time in nearly half a century. I find that CDS trading affects corporate cash holdings. Corporate cash holdings increase after the inception of CDS trading. The impact is significant after controlling for the endogeneity of CDS trading. Moreover, cash-to-assets ratios for firms with larger CDS contracts outstanding, and those with less access to financial market are more affected by CDS trading. The impact of CDS is beyond the direct effect of line of credit on cash holdings. / published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy

Thesis (M.Phil.)--Hong Kong University of Science and Technology, 2009. / Includes bibliographical references (p. 58-60).

Thesis (Ph. D.)--University of Chicago, Graduate School of Business, August 2002. / Includes bibliographical references. Also available on the Internet.

Thesis (Ph. D.)--University of Texas at Austin, 2005. / Vita. Includes bibliographical references.

Unique and proprietary data of the illiquid, one-year non cancelable for three month Bermudan swaps (1Y NC 3M swaps) and one-year non callable for three months Bermudan CDs (1Y NC 3M CDs), provides evidence of market efficiency. The 1Y NC 3M swap and 1Y NC 3M CD markets efficiently reflected unexpected economic information. The 1Y NC 3M swaption premiums also followed the European one-year into three-month (1Y into 3M) swaption volatilities. Swaption premiums were computed by pricing non-optional instruments using the quoted 1Y NC 3M swap rates and the par value swap rates and taking the difference between them. Swaption premiums ranged from a slight negative premium to a 0.21 percent premium. The average swaption premium during the study period was 0.02 percent to 0.04 percent. The initial swaption premiums were over 0.20 percent while the final swaption premiums were 0.02 percent to 0.04 percent. Premiums peaked and waned throughout the study period depending on market uncertainty as reflected in major national economic announcements, Federal Reserve testimonies and foreign currency devaluations. Negative swaption premiums were not necessarily irrational or quoting errors. Frequently, traders obligated to provide market quotes to customers do not have an interest and relay that lack of interest to the customer through a nonaggressive quote. The short-dated 1Y NC 3M swaption premiums closely followed 3M into 1Y swaption volatilities, indicating the 3M into 1Y swaption market closely follows the 1Y NC 3M swaption market and that similar market factors affect both markets or both markets efficiently share information. Movements in 1Y NC 3M swaption premiums and in 3M into 1Y swaption volatilities reflected a rational response by market participants to unexpected economic information. As market uncertainty decreased in the market place, risk measured both by swaption premiums and swaption volatilities decreased; vice verse when economic factors showed increases in economic uncertainty.

As evidenced by its market size, credit default swaps (CDSs) has been the cornerstone product of the credit derivatives market. The central question that I attempt to answer in this thesis is: why and how does the introduction of CDS market affect bank loan financing? Theoretical works predict some potential effects from CDS market, but empirical evidence is still rare. This dissertation empirically examines the effects of CDS trading on bank loan financing. In chapter one, I find that banks increase average loan amount and charge higher loan spread after the onset of CDS trading on the borrower’s debt. Also, credit quality of the borrower deteriorates for those with active CDS trading. These findings suggest that banks tend to take on more credit risk by issuing larger loans and by lending to riskier firms that could not obtain bank loan in the absence of CDS. The risk-taking by banks ultimately transmitted to higher bank-level risk profile. The second chapter is the first empirical study of CDS’ role in determining loan syndicate structure. I find larger lead bank share when CDS is in place. Moreover, participation of credit derivatives trading by lead banks is much larger than by the participants, suggesting that lead banks have better chance to use CDS to their own advantage. Further analysis shows that lead banks retain an even larger share when it is more experienced dealing with the borrower and when information asymmetry between the lender and the borrower is less severe. Different from conventional wisdom about moral hazard in syndicated lending, our findings suggest that the lead bank likely takes on more credit risk voluntarily due to its increased financing capacity. The third chapter focuses on the effects of CDS on debt contracting. Given that current evidence does not show CDS reduces average cost of debt, we conjecture that the diversification benefit is reflected by relaxation of restrictions imposed on borrowers. Consistent with our hypothesis, we find the marginal effect from CDS trading on covenant strictness measure is 16.8% on average. One standard deviation increase in the number of outstanding CDS contracts loosens net worth covenants by approximately 8.9%. Using various endogeneity controls, we are able to show the loosening of covenants is due to the reduced level of debtholder-shareholder conflict. Furthermore, the loosening effect is stronger when the expected renegotiation cost is larger, consistent with the view that CDS mitigates contracting friction and improves contracting efficiency. Overall, this dissertation attempts to provide first empirical evidence on how CDS affects bank loan financing. We focus the analysis on loan issuance, syndicate structure and contracting. The findings suggest that banks lend to riskier borrowers in the presence of CDS. On a positive note, banks tend to impose less restrictive covenants on its borrower, which may mitigate frictions in lending market in terms of ex ante bargaining and ex post renegotiation cost. / published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy

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Zugl.: Tübingen, Universiẗat, Diss., 2006. / Includes bibliographical references (p. 223-248).

Thesis (M.A.)--Virginia Polytechnic Institute and State University, 1993. / Vita. Abstract. Includes bibliographical references (leaves 88-91). Also available via the Internet.