Collateral constraints, tranching, and price bases
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199_2022_1414_ReferencePDF.pdf
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455.48 KB
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Author(s)
Gong, Feixue
Phelan, Gregory
Date Issued
January 25, 2022
Publisher
Springer Berlin Heidelberg
Citation
Gong, Feixue and Phelan, Gregory. 2022. "Collateral constraints, tranching, and price bases."
Version
Author's final manuscript
Abstract
Abstract
We consider a multi-state, general-equilibrium model with collateralized financial promises to study how allowing an asset to back multiple financial contracts (i.e., tranching) affects price bases. A basis emerges when one asset can be tranched to issue more derivative securities than can be backed by another asset. Variations in the ability to tranche an asset or to pyramid derivative debt lead to variations in price bases. Tranching a CDS, as occurs with the CDX index, increases the basis on the underlying asset. Our theory correctly predicts that inclusion in the CDX index increases the underlying CDS basis.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1007/s00199-022-01414-8
