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research article

The CDS-bond basis

Bai, Jennie
•
Collin-Dufresne, Pierre  
June 1, 2019
Financial Management

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.

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Type
research article
DOI
10.1111/fima.12252
Web of Science ID

WOS:000470918400003

Author(s)
Bai, Jennie
Collin-Dufresne, Pierre  
Date Issued

2019-06-01

Publisher

WILEY

Published in
Financial Management
Volume

48

Issue

2

Start page

417

End page

439

Subjects

Business, Finance

•

Business & Economics

•

credit risk

•

swap

•

liquidity

•

illiquidity

•

spreads

•

return

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-PCD  
Available on Infoscience
June 25, 2019
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/158509
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