2020
DOI: 10.36934/wecon2020-003
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Collateral Constraints, Tranching, and Price Bases

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 th… Show more

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