Biases in CDS Spreads after the CDS Big Bang

Journal of Fixed Income, Forthcoming

Posted: 5 Feb 2020 Last revised: 27 Feb 2020

See all articles by Xinjie Wang

Xinjie Wang

Southern University of Science and Technology

Hongjun Yan

DePaul University

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: January 8, 2020

Abstract

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

Wang, Xinjie and Yan, Hongjun and Zhong, Zhaodong, Biases in CDS Spreads after the CDS Big Bang (January 8, 2020). Journal of Fixed Income, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3510916 or http://dx.doi.org/10.2139/ssrn.3510916

Xinjie Wang (Contact Author)

Southern University of Science and Technology ( email )

1088 Xueyuan Blvd
Xili, Nanshan District
Shenzhen, Guangdong 518055
China

Hongjun Yan

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/hongjunyanhomepage/

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Department of Finance, Rutgers Business School
100 Rockafeller Road
Piscataway, NJ 08854
United States

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