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Exploring the CDS-Bond Basis

Author

Listed:
  • 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/ts/publications/wp/wp104en.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bond; Co integration; Credit; Risk Neutrality;
    All these keywords.

    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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