Biases in CDS Spreads after the CDS Big Bang
Journal of Fixed Income, Forthcoming
Posted: 5 Feb 2020 Last revised: 27 Feb 2020
Date Written: January 8, 2020
The ISDA CDS standard model assumes a single flat hazard rate (default intensity) rather than a term structure of hazard rates. This assumption introduces biases into CDS spreads for empirical research after the CDS Big Bang. This paper is the first to document the biases and provide a simple correction scheme. We quantify the biases using a large panel of CDS data for the period from April 2010 to October 2016. The correction is important for measures based on differences in CDS spreads, such as CDS-bond basis.
Keywords: ISDA standard CDS model, CDS spread, bias, upfront payment, fixed coupon, term structure
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation