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Exploring the CDS-Bond Basis

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  • Jan De Wit

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    (NBB, Financial Markets Department)

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    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.

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    File URL: http://www.nbb.be/doc/oc/repec/reswpp/WP104.pdf
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    Bibliographic Info

    Paper provided by National Bank of Belgium in its series Working Paper Research with number 104.

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    Length: 41 pages
    Date of creation: Nov 2006
    Date of revision:
    Handle: RePEc:nbb:reswpp:200611-16

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    Keywords: Bond; Co integration; Credit; Risk Neutrality;

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    Cited by:
    1. Gann, Philipp & Laut, Amelie, 2008. "Einflussfaktoren auf den Credit Spread von Unternehmensanleihen," Discussion Papers in Business Administration 4231, University of Munich, Munich School of Management.

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