Replication data for: Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes

Principal Investigator(s): View help for Principal Investigator(s) Ana Fostel; John Geanakoplos

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Project Citation:

Fostel, Ana, and Geanakoplos, John. Replication data for: Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes. Nashville, TN: American Economic Association [publisher], 2012. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2019-10-12. https://doi.org/10.3886/E114236V1

Project Description

Summary: We show how the timing of financial innovation might have contributed to the mortgage bubble and then to the crash of 2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterward. This may seem puzzling, since it implies that creating a derivative tranche in the securitization whose payoffs are identical to the CDS will raise the underlying asset price, while the CDS outside the securitization lowers it. The resolution of the puzzle is that the CDS lowers the value of the underlying asset since it is equivalent to tranching cash. (JEL E32, E44, G01, G12, G13, G21).

Scope of Project

JEL Classification:
      E32 Business Fluctuations; Cycles
      E44 Financial Markets and the Macroeconomy
      G01 Financial Crises
      G12 Asset Pricing; Trading Volume; Bond Interest Rates
      G13 Contingent Pricing; Futures Pricing; option pricing
      G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages

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Published Versions

V1 [2019-10-12]

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