Partnoy’s (Credit Derivative) Complaint

If you haven’t read it, you really should wade into Frank Partnoy’s (and co-author David Skeel’s) recent paper on credit derivatives. It’s long and detailed, but Partnoy is a felicitous and smart writer, and so it’s worth it.

… we discuss the benefits associated with both types of credit derivatives, which include increased opportunities for hedging, increased liquidity, reduced transaction costs, and a deeper and potentially more efficient market for trading credit risk. We then discuss the risks associated with credit derivatives, such as moral hazard and other incentive problems, limited disclosure, potential systemic risk, high transaction costs, and the mispricing of credit. After considering the benefits and risks, we discuss some of the implications of our findings, and make some preliminary recommendations. In particular, we focus on the issues of disclosure, regulatory licenses associated with credit ratings, and the special treatment of derivatives in bankruptcy.

The Promise and Perils of Credit Derivatives

DAVID A. SKEEL Jr.
University of Pennsylvania Law School
FRANK PARTNOY
University of San Diego – School of Law

Related posts:

  1. Credit Derivatives Markets Booms Despite Bust
  2. Remember When Credit Risk Was all the Rage?
  3. Credit Markets, Minsky Moments, and FASB Rule 157
  4. The Trouble with Credit Market Alarmism
  5. Credit Tightening vs. Credit Crunch