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An Empirical Study of CDS Premium on the Korean Sovereign Bond: Some Effect of the CTD Option

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  • Keehwan Park
  • Sangki Lee

Abstract

We test the parity relation for two credit prices of the Korean sovereign bond, and investigate the time-varying property of the basis of the CDS premium from the bond spread. Both the global and country-specific risks are responsible for explaining the variation in the CDS premium. The unexplained variation in the CDS premium is, in turn, significantly associated with the time-varying CTD option value. Given our empirical findings, an emerging government ought to be cautious when it comes to issuing sovereign bonds with large CTD option value because the CTD bond could render its CDS premium unnecessarily high.

Suggested Citation

  • Keehwan Park & Sangki Lee, 2017. "An Empirical Study of CDS Premium on the Korean Sovereign Bond: Some Effect of the CTD Option," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(4), pages 848-864, April.
    • Handle: RePEc:mes:emfitr:v:53:y:2017:i:4:p:848-864
    DOI: 10.1080/1540496X.2016.1142210
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    Cited by:

    1. Jung Park, Yuen & Kutan, Ali M. & Ryu, Doojin, 2019. "The impacts of overseas market shocks on the CDS-option basis," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 622-636.

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