Debt Collateralization, Structured Finance, and the CDS Basis
Feixue Gong and
Gregory Phelan ()
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Feixue Gong: Massachusetts Institute of Technology
No 2019-18, Department of Economics Working Papers from Department of Economics, Williams College
Tranching an asset increases its basis; tranching a CDS, as occurs with the CDX index, increases the CDS basis on the underlying asset. We study how the ability to use financial contracts as collateral affects the CDS basis using a general equilibrium model with collateralized financial promises and multiple states of uncertainty. A positive basis emerges when risky assets and their derivative debt 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: 63 pages
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-fmk
Note: This is an update of WP 2016-06
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Working Paper: Debt Collateralization, Structured Finance, and the CDS Basis (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:wil:wileco:2019-18
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