Asset value and securitization under heterogeneous beliefs

This paper studies how securitization affects asset prices and realized returns when investors hold heterogeneous beliefs. I extend the resale-option asset-pricing model of Harrison and Kreps(1978) by allowing the owner of a long-term asset to issue a finite set of asset-backed securities backed by its future cash flow. These securities are organized into tranches with different payment priorities. Because each tranche is priced by the investor most optimistic about that tranche, securitization weakly raises the value of the underlying asset. A strict increase requires that no belief about next-period asset prices first-order stochastically dominates all other beliefs. The same mechanism has ambiguous effects on realized returns: securitization can transfer low-return claims across agents. When one agent has the finest information partition, securitization may lower some agents' realized returns without raising anyone else's. The results provide a characterization of how belief disagreement shapes the impact of security design on asset prices and realized returns.