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Exploring the CDS-Bond Basis

  • Jan De Wit

    ()

    (NBB, Financial Markets Department)

Registered author(s):

    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: https://www.nbb.be/doc/oc/repec/reswpp/wp104.pdf
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    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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    1. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
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