Fostel, Ana; Geanakoplos, John - In: American Economic Journal: Macroeconomics 4 (2012) 1, pp. 190-225
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...