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research article
The CDS-bond basis
June 1, 2019
We investigate the cross-sectional variation in the credit default swap (CDS)-bond bases and test explanations for the violation of the arbitrage relation between cash bond and CDS contract, which states that the basis should be zero in normal conditions. The evidence is consistent with "limits to arbitrage" theories in that deviations are larger for bonds with higher frictions as measured by trading liquidity, funding cost, counterparty risk, and collateral quality. Surprisingly, we find the basis to be more negative when bond lending fee is higher suggesting that arbitrageurs are unwilling to engage in a negative basis trade when short interest on the bond is high.
Type
research article
Web of Science ID
WOS:000470918400003
Authors
Publication date
2019-06-01
Publisher
Published in
Volume
48
Issue
2
Start page
417
End page
439
Peer reviewed
REVIEWED
EPFL units
Available on Infoscience
June 25, 2019
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