School, and the NBER Corporate Finance meetings. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

No abstract

This chapter surveys the literature on bubbles, financial crises, and systemic risk. The first part of the chapter provides a brief historical account of bubbles and financial crisis. The second part of the chapter gives a structured overview of the literature on financial bubbles. The third part of the chapter discusses the literatures on financial crises and systemic risk, with particular emphasis on amplification and propagation mechanisms during financial crises, and the measurement of systemic risk. Finally, we point toward some questions for future research.

Using novel position and trading data for single-name corporate credit default swaps (CDSs), we provide evidence that CDS markets emerge as "alternative trading venues" that serve a standardization and liquidity role. CDS positions and trading volume are larger for firms with bonds that are fragmented into many separate issues and have heterogeneous contractual terms. Whereas hedging motives are associated with trading volume in the bond and CDS markets, speculative trading concentrates in the CDS. Cross-market arbitrage links the CDS and bond market via the basis trade, compressing the negative CDS-bond basis and reducing price impact in the bond market. * We would like to thank the DTCC for providing the data used in this research. For comments and suggestions, we are grateful to three anonymous referees, Viral Acharya,

for helpful comments on earlier drafts of this chapter. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w18398.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

No abstract

Why do some firms, especially financial institutions, finance themselves so short‐term? We show that extreme reliance on short‐term financing may be the outcome of a maturity rat race: a borrower may have an incentive to shorten the maturity of an individual creditor's debt contract because this dilutes other creditors. In response, other creditors opt for shorter maturity contracts as well. This dynamic toward short maturities is present whenever interim information is mostly about the probability of default rather than the recovery in default. For borrowers that cannot commit to a maturity structure, equilibrium financing is inefficiently short‐term.

Commentators have raised concerns about the empty creditor problem that arises when a debtholder has obtained insurance against default but otherwise retains control rights in and outside bankruptcy. We analyze this problem from an ex-ante and ex-post perspective in a formal model of debt with limited commitment, by comparing contracting outcomes with and without credit default swaps (CDS). We show that CDS, and the empty creditors they give rise to, have important ex-ante commitment benefits: By strengthening creditors' bargaining power they raise the debtor's pledgeable income and help reduce the incidence of strategic default. However, we also show that lenders will over-insure in equilibrium, giving rise to an inefficiently high incidence of costly bankruptcy. We discuss a number of remedies that have been proposed to overcome the inefficiency resulting from excess insurance. One of the most signi…cant changes in the debtor-creditor relationship in the past few years has been the creation and subsequent exponential growth of the market for credit insurance, in particular credit default swaps (CDS). An important aspect of this development is that credit insurance with CDS does not just involve a risk transfer to the insurance seller. It also signi…cantly alters the debtor-creditor relation in the event of …nancial distress, as it partially or fully separates the creditor's control rights from his cash- ‡ow rights. Legal scholars (Hu and Black (2008a,b)) and …nancial analysts (e.g. Yavorsky (2009)) have raised concerns about the possible consequences of such a separation, arguing that CDS may create empty creditors-holders of debt and CDS-who no longer have an interest in the e¢ cient continuation of the debtor, and who may push the debtor into ine¢ cient bankruptcy or liquidation: Patrick Bolton"Even a creditor with zero, rather than negative, economic ownership may want to push a company into bankruptcy, because the bankruptcy …ling will trigger a contractual payo¤ on its credit default swap position.", Hu and Black (2008a), pp.19.We argue in this paper that while a creditor with a CDS contract may indeed be more reluctant to restructure debt of a distressed debtor, it does not necessarily follow that the presence of CDS will inevitably lead to an ine¢ cient outcome. In a situation where the debtor has limited ability to commit to repay his debt, a CDS strengthens the creditor's hand in ex-post debt renegotiation and thus may actually help increase the borrower's debt capacity. The relevant question is thus whether the presence of CDS leads to debt market outcomes in which creditors are excessively tough even after factoring in these ex-ante commitment bene…ts of CDS.In a CDS, the protection seller agrees to make a payment to the protection buyer in the event of a credit event on a prespeci…ed reference asset. In exchange for this promised payment, the protection seller receives a periodic premium payment from the buyer. The credit event may be the bankruptcy …ling of the debtor, non-payment of the d...