Debt Collateralization, Structured Finance, and the CDS Basis

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

No 2016-06, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: We study how the ability to use risky debt as collateral in funding markets affects the CDS basis. We use a general equilibrium model with heterogeneous agents, collateralized financial promises, and multiple states of uncertainty. We show that a positive basis emerges when risky assets and their derivative risky debt contracts can be used as collateral for additional financial promises. Additionally, because a risky asset can always serve as collateral for more promises than its derivative debt contracts can, the basis for a risky asset will always differ from the basis for its derivative risky debt.

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: 51 pages
Date: 2016-03, Revised 2017-08
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Debt Collateralization, Structured Finance, and the CDS Basis (2019)
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