2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterwards. 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 …

-2009. We study the effect of leverage, tranching, securitization and CDS on asset prices in a general equilibrium model with … collateral. We show why tranching and leverage tend to raise asset prices and why CDS tend to lower them. This may seem puzzling …, since it implies that creating a derivative tranche in the securitization whose payoffs are identical to the CDS will raise …