Title: Strategic Formation of Financial Networks with Credit Default Swaps
Abstract: I study a setting in which banks enter strategically into two kinds of contracts with each other: debt (i.e., loans to other banks) and credit default swaps (i.e., default insurance on other banks). Banks act under uncertainty about the future and only limited information about the actions of other banks. My main goal is to understand if and when the availability of CDSs reduces systemic risk in equilibrium.
In this talk, I present some intermediate results of my work. I will discuss i) a simple model of strategic network formation with CDSs, ii) a simulation exercise I conducted together with our visitor Juan Manuel Sanches Cartas, and iii) some first theoretical results on equilibrium behavior.