Inside the Currency Board Arrangement Risky Spreads and Credit Default Swap - Sovereign Bonds Basis
Posted: 26 Jun 2012 Last revised: 18 Dec 2015
Date Written: January 15, 2015
The paper investigates the risky sovereign spreads and the CDS-Bond basis of a country following a fixed exchange rate under a Currency Board Arrangement (CBA). The particular monetary regime affects significantly the mechanics of the bond market and needs a special investigation. We start by characterizing the drivers of the spreads in a general no-arbitrage setting. Both the credit and the currency components are extracted and analyzed. Then we turn attention to the CDS-Bond basis. We elaborate on its measurement in a multi-curve framework. Further, the factors driving the basis are explored across a representative set of CBA countries. The results of the paper provide a view about the proper diagnostics of the sovereign risk and can be used for a better understanding of the price discovery process of the sovereign bonds as well as in relative value analysis.
Keywords: credit spread, currency spread, CDS-Bond basis
JEL Classification: F31, G12, E43, C58
Suggested Citation: Suggested Citation