We consider a multi-state, general-equilibrium model with collateralized financial promises to study how allowing an asset to back multiple financial contracts (i.e., tranching) affects price bases. A basis emerges when one asset can be tranched to issue more derivative securities than can be...

Many capital structures implicitly or explicitly give agents the ability to use debt contracts as collateral for other financial promises. We study the effects of allowing debt to be used as collateral in a general equilibrium model with heterogeneous agents, collateralized financial contracts,...