Job Market Paper
Asset value and securitization under heterogeneous beliefs
This paper studies the effect of securitization on asset pricing when agents have heterogeneous beliefs about the stochastic process on dividends, prices and interest rates. For this purpose, the asset pricing model of Harrison and Kreps (1978) is modified to account for the possibility for agents to issue asset backed securities. The securities are constrained to belong to tranches of different payment priority, mimicking collateralized debt obligations (CDO). Securitization weakly increases the gap between the price of an underlying asset and any perceived present value of its dividends. A necessary condition for this increase to be strict is the absence of beliefs regarding the next-period price of the underlying asset which first-order stochastically dominate all others beliefs. In states of the world where investors with divergent beliefs buy securities from different tranches, the underlying asset is traded at a price higher than what anyone thinks it is worth. Since securities with a return below the market interest rate may be traded across agents, securitization has mixed effects on portfolio returns. In cases where there is a type of agent more sophisticated than all others, securitization can weakly decrease the returns all agents receive.