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Exploring the CDS-Bond Basis

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  • Jan De Wit

    () (NBB, Financial Markets Department)

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.

Suggested Citation

  • Jan De Wit, 2006. "Exploring the CDS-Bond Basis," Working Paper Research 104, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:200611-16
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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp104.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Virginie Coudert & Mathieu Gex, 2010. "Le règlement des défauts sur le marché des credit default swaps : le cas de Lehman Brothers," Revue d'Économie Financière, Programme National Persée, vol. 97(2), pages 15-34.
    2. Mamatzakis, Emmanuel & Tsionas, Mike G., 2015. "How are market preferences shaped? The case of sovereign debt of stressed euro-area countries," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 106-116.
    3. Stefano Giglio, 2011. "Credit default swap spreads and systemic financial risk," Proceedings 1122, Federal Reserve Bank of Chicago.
    4. 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.
    5. Virginie Coudert & Mathieu Gex, 2013. "The Interactions between the Credit Default Swap and the Bond Markets in Financial Turmoil," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 492-505, August.

    More about this item

    Keywords

    Bond; Co integration; Credit; Risk Neutrality;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other

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