This paper shows that credit default swaps (CDS) can affect the type of debt firms issue. Firms face a trade-off between investment scale and the cost of capital measured by the credit spread. Small-scale investment is safe, fully collateralized, but earns modest profits in all states....

Spanish Abstract: En esta investigación se describen los distintos mercados de swaps y se desarrollan varias fórmulas de valuación sobre los supuestos de equilibrio general y ausencia de riesgo crédito. La mayoría de estos contratos pueden analizarse como la diferencia entre dos bonos...

We develop an analytically tractable general equilibrium model to analyze the welfare effects of CDS trading and CDS regulation under aggregate uncertainty. If available equity capital is below a threshold, any equilibrium of the basic economy with no CDS markets features firm default and...