Research Achievement by Young Teacher Yu Yuejuan Published in International Authoritative Finance Journal Journal of Empirical Finance

Recently, the research paper CDS and Credit: The Effect of the Bangs on Credit Insurance, Lending and Hedging by young teacher Yu Yuejuan from the School of Economics, Shandong University, was published online in Journal of Empirical Finance, an international authoritative finance journal. Yu Yuejuan is the co-first author, and the other authors of the paper are Researcher Yalin Gündüz from Deutsche Bundesbank, Professor Steven Ongena from the University of Zurich, Switzerland, and Associate Professor Günseli Tümer-Alkan from Vrije Universiteit Amsterdam, the Netherlands.

Credit Default Swaps (CDS) are similar to insurance contracts that protect buyers from compensation when the underlying debtor defaults. As a mainstream international credit derivative, CDS is mainly used to hedge credit risk, but they have also been accused of amplifying credit risk in financial markets during the global financial crisis. This paper studies an exogenous reform to improve the standardization of the CDS market and links this reform to the subsequent changes in bank loan supply. The paper finds that after this standardization reform, the cost for non-dealer banks to purchase CDS contracts decreased. Due to the lower insurance cost, these banks provided more loans to affected underlying enterprises and hedged their credit risk exposures more effectively than dealer banks. Therefore, the standardization reform reduces the cost of credit insurance and leads to a relative increase in credit supply by positively affected banks. This research provides strong evidence that financial innovation is conducive to reducing financial risks, indicating that policies to promote financial innovation and develop the CDS market do not necessarily exacerbate banks' moral hazard, but rather promote risk mitigation.