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  1. Explaining the Bond-CDS Basis
    the role of credit risk and liquidity
    Author: Bühler, Wolfgang; Gehde-Trapp, Monika
    Published: 2009
    Publisher:  Centre for Financial Research, Cologne

    We explore the relationship between CDS premia and bond asset swap spreads on the same reference entity. As Duffie (1999) shows, there is a clear theoretical link between CDS premia and bond prices if the two quantities are viewed as a pure measure... more

    Access:

    Location:
    Niedersächsische Staats- und Universitätsbibliothek Göttingen
    Inter-library loan:
    No inter-library loan

    Location:
    ZBW - Leibniz-Informationszentrum Wirtschaft, Standort Kiel
    Signature:
    DS 142 (2009,12)
    Inter-library loan:
    No inter-library loan

     

    We explore the relationship between CDS premia and bond asset swap spreads on the same reference entity. As Duffie (1999) shows, there is a clear theoretical link between CDS premia and bond prices if the two quantities are viewed as a pure measure of credit risk. However, many studies provide evidence that factors other than credit risk seem to affect bond prices and CDS premia, and these factors may partially obscure the relationship. We focus on the difference between the yield spread and the CDS premium, the bond-CDS basis, and show that the basis is highly sensitive to firm-specific and market wide credit risk and liquidity. If CDS and bonds are used in a dynamic hedging strategy or in a basis trading strategy that depends on the convergence of CDS and bond markets, it is necessary to correctly quantify the associated risks of these strategies.

     
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    Content information
    Source: Union catalogues
    Language: English
    Media type: Book
    Format: Online
    Other identifier:
    hdl: 10419/41372
    Series: CFR working paper ; 09-12
    Subjects: Kreditderivat; Anleihe; Risikoprämie; Geld-Brief-Spanne; Kreditrisiko; Marktliquidität; Schätzung; Welt
    Scope: Online-Ressource (PDF-Datei: 34 S., 524 KB)
    Notes:

    Zsfassung in dt. Sprache
  2. Time-varying credit risk and liquidity premia in bond and CDS markets
    Author: Bühler, Wolfgang; Gehde-Trapp, Monika
    Published: 2009
    Publisher:  Centre for Financial Research, Cologne

    We develop a reduced-form model that allows us to decompose bond spreads and CDS premia into a pure credit risk component, a pure liquidity component, and a component measuring the relation between credit risk and liquidity. CDS liquidity has... more

    Access:

    Location:
    Niedersächsische Staats- und Universitätsbibliothek Göttingen
    Inter-library loan:
    No inter-library loan

    Location:
    ZBW - Leibniz-Informationszentrum Wirtschaft, Standort Kiel
    Signature:
    DS 142 (2009,13)
    Inter-library loan:
    No inter-library loan

     

    We develop a reduced-form model that allows us to decompose bond spreads and CDS premia into a pure credit risk component, a pure liquidity component, and a component measuring the relation between credit risk and liquidity. CDS liquidity has important consequences for the bond credit risk and liquidity components. Besides the credit risk link, we document a liquidity link between the bond and the CDS market. Liquidity in both markets dries up as credit risk increases, and higher bond market liquidity leads to lower CDS market liquidity. Ignoring CDS liquidity results in partly negative liquidity premia, particularly when CDS liquidity is low.

     
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    Content information
    Source: Union catalogues
    Language: English
    Media type: Book
    Format: Online
    Other identifier:
    hdl: 10419/41349
    Series: CFR working paper ; 09-13
    Subjects: Anleihe; Kreditderivat; Kreditrisiko; Marktliquidität; Rentenmarkt; Dekompositionsverfahren
    Scope: Online-Ressource (PDF-Datei: 43 S., 1 MB)
    Notes:

    Zsfassung in dt. Sprache
  3. Trading the bond-CDS basis
    the role of credit risk and liquidity
    Author: Gehde-Trapp, Monika
    Published: 2009
    Publisher:  Centre for Financial Research, Cologne

    We analyze trading opportunities that arise from differences between the bond and the CDS market. By simultaneously entering a position in a CDS contract and the underlying bond, traders can build a default-risk free position that allows them to... more

    Access:

    Location:
    Niedersächsische Staats- und Universitätsbibliothek Göttingen
    Inter-library loan:
    No inter-library loan

    Location:
    ZBW - Leibniz-Informationszentrum Wirtschaft, Standort Kiel
    Signature:
    DS 142 (2009,16)
    Inter-library loan:
    No inter-library loan

     

    We analyze trading opportunities that arise from differences between the bond and the CDS market. By simultaneously entering a position in a CDS contract and the underlying bond, traders can build a default-risk free position that allows them to repeatedly earn the difference between the bond asset swap spread and the CDS, known as the basis. We show that the basis size is closely related to measures of company-specific credit risk and liquidity, and to market conditions. In analyzing the aggregate profits of these basis trading strategies, we document that dissolving a position leads to significant profit variations, but that attractive risk-return characteristics still apply. The aggregate profits depend on the credit risk, liquidity, and market measures even more strongly than the basis itself, and we show which conditions make long and short basis trades more profitable. Finally, we document the impact of the financial crisis on the profits of long and short basis trades, and show that the formerly more profitable long basis trades experienced stronger profit decreases than short basis trades. -- bond asset swap spreads ; CDS premia ; basis trading profits ; credit risk ; liquidity ; fixed-effects ; vector error correction model

     
    Export to reference management software   RIS file
      BibTeX file
    Content information
    Source: Union catalogues
    Language: English
    Media type: Book
    Format: Online
    Other identifier:
    hdl: 10419/41361
    Series: CFR working paper ; 09-16
    Subjects: Anleihe; Kreditderivat; Wertpapierhandel; Rentabilität; Kreditrisiko; Marktliquidität; Kointegration; Schätzung; Schätzung; Deutschland
    Scope: Online-Ressource (PDF-Datei: 43 S., 911 KB)
    Notes:

    Zsfassung in dt. Sprache