The Asset Swap-Credit Default Swap Basis

The CDS‐Bond Basis Arbitrage and the Cross Section of Corporate Bond Returns

“…The basis for a given firm i at time t for a given maturity τ is defined as the CDS spread ( CDS i , t , τ ) minus the bond spread ( Z i , t , τ ), both of which are measured at time t for maturity τ . While there are many different ways to compute the bond spread, in our empirical analysis, we mainly use Z‐spread, which has been widely used in industry in defining the basis according to Choudhry () . To construct the basis, we first compute the Z‐spread for each bond on each day, and then match the computed Z‐spread with the CDS spread with the same maturity.…”

Marking-to-market government guarantees to financial systems – Theory and evidence for Europe

“…Moreover, we remind that the technical structure of the CDS, which is a derivative contract having the whole debt of an obligor as the underlying asset, is considered by market participants the best possible representation of his credit standing. Finally, it is well known that the CDS and the bond markets are tightly linked by an arbitrage relationship, which is technically known as "basis" (see Choudhry, 2006).…”

Credit default swap pricing using artificial neural networks

“…These are the one-year United States treasury yield, the leverage ratio, the recovery rate, the one-year implied volatility, historic five-year CDS prices, and the equity price. The first four of these parameters are considered because they are commonly used by analytical pricing methods and are known to have strong correlations with CDS price [6][7][8][9]. The historic CDS prices are considered because they have greatly improved prediction accuracy when used in CDS pricing [5].…”

“…A major concern when trading CDS is determining the value, measured in basis points of the CDS notional, at which the predetermined payments should be set; that is, determining the correct price for the CDS [5]. Several analytical methods have been developed to provide estimates of CDS prices [6][7][8], they, however, have limitations that affect their accuracy: For instance, the probability model [6], in its simplicity, does not take into consideration many market parameters known to influence CDS prices. Furthermore, the commonly used Hull and White reduced-form model [7] and the CreditGrades ™ model [8] include assumptions about the CDS market that limit their applications [3].…”