Inside the Currency Board Arrangement Risky Spreads and Credit Default Swap - Sovereign Bonds Basis

Posted: 26 Jun 2012 Last revised: 18 Dec 2015

Vilimir Yordanov

Independent

Konstantin Prodanov

Independent

Atanas Totkov

Independent

Date Written: January 15, 2015

Abstract

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

Yordanov, Vilimir and Prodanov, Konstantin and Totkov, Atanas, Inside the Currency Board Arrangement Risky Spreads and Credit Default Swap - Sovereign Bonds Basis (January 15, 2015). Available at SSRN: https://ssrn.com/abstract=2091866 or http://dx.doi.org/10.2139/ssrn.2091866

Konstantin Prodanov

Independent ( email )

No Address Available

Atanas Totkov

Independent ( email )

No Address Available

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