Collateral Constraints, Tranching, and Price Bases

Feixue Gong and Gregory Phelan
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Feixue Gong: Massachusetts Institute of Technology

No 2020-03, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: Tranching an asset increases its basis; tranching a CDS, as occurs with the CDX index, increases the basis on the underlying asset. We consider a general equilibrium model with collateralized financial promises and multiple states of uncertainty to study how allowing an asset to back multiple financial contracts (i.e., tranching) affects price bases. A positive basis emerges when risky assets and their derivative contracts can be used as collateral for financial promises. We provide an empirical test of our theory using inclusion in the CDX and find that inclusion in the CDX increases the CDS basis.

Keywords: Collateral; securitized markets; cash-synthetic basis; credit default swaps; asset prices; credit spreads. (search for similar items in EconPapers)
JEL-codes: D52 D53 G11 G12 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2020-01-09
New Economics Papers: this item is included in nep-fmk
Note: This is an update of working paper 2019-18
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Collateral constraints, tranching, and price bases (2023)
Working Paper: Collateral Constraints, Tranching, and Price Bases (2021)
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