Exploring the CDS-Bond Basis

National Bank of Belgium Working Paper No. 104

41 Pages Posted: 7 Oct 2010

See all articles by Jan De Wit

Jan De Wit

affiliation not provided to SSRN

Date Written: November 16, 2006

Abstract

Markets for credit default swaps (CDS) and bonds of the same reference entity and maturity are bound by no-arbitrage conditions. Indeed, using a large data set we show that CDS premia and par asset swap spreads are mostly cointegrated. Nonetheless, the average CDS-bond basis (i.e. the difference between both measures) is positive in the period 2004-2005. We detect fourteen different economic basis drivers, which make the basis firm-specific and time-dependent. Furthermore, we describe the basis smile, and illustrate that the average basis is the lowest for five year maturities of corporate credits denominated in euro.

Keywords: Bond, Co integration, Credit, Risk Neutrality

JEL Classification: C12, C19, C23, G15, G19

Suggested Citation

De Wit, Jan, Exploring the CDS-Bond Basis (November 16, 2006). National Bank of Belgium Working Paper No. 104, Available at SSRN: https://ssrn.com/abstract=1687659 or http://dx.doi.org/10.2139/ssrn.1687659

Jan De Wit (Contact Author)

affiliation not provided to SSRN ( email )

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