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CDS-bond basis and bond return predictability
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Kim, Gi Hyun, Li, Haitao and Zhang, Weina (2016) CDS-bond basis and bond return predictability. Journal of Empirical Finance, 38 . pp. 307-337. doi:10.1016/j.jempfin.2016.07.006 ISSN 0927-5398.
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Official URL: http://dx.doi.org/10.1016/j.jempfin.2016.07.006
Abstract
We examine the predictive power of the CDS-bond basis for future corporate bond returns. We find that residual basis, the part of the CDS-bond basis that cannot be explained by a wide range of market frictions such as counterparty risk, funding risk, and liquidity risk, strongly negatively predicts excess returns. Controlling for systematic risk factors, including credit risk and liquidity risk, we find that a bond portfolio formed on the residual basis generates a significant abnormal bond return of 1.79% at the 20-day horizon. The abnormal returns due to the residual basis reflect mispricing rather than missing systematic risk factors. These results are robust to different horizons and sample periods and to the various characteristics of bonds. Overall, our results imply a beneficial role of CDS in the bond market as the existence of mispricing between CDS and bonds results in a subsequent price convergence in bonds.
Item Type: | Journal Article | ||||||||||
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Subjects: | H Social Sciences > HG Finance | ||||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Arbitrage, Corporate bonds, Global Financial Crisis, 2008-2009 | ||||||||||
Journal or Publication Title: | Journal of Empirical Finance | ||||||||||
Publisher: | Elsevier | ||||||||||
ISSN: | 0927-5398 | ||||||||||
Official Date: | September 2016 | ||||||||||
Dates: |
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Volume: | 38 | ||||||||||
Page Range: | pp. 307-337 | ||||||||||
DOI: | 10.1016/j.jempfin.2016.07.006 | ||||||||||
Status: | Peer Reviewed | ||||||||||
Publication Status: | Published | ||||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||||
Date of first compliant deposit: | 16 September 2016 | ||||||||||
Date of first compliant Open Access: | 22 January 2018 | ||||||||||
Funder: | Singapore. Ministry of Education | ||||||||||
Grant number: | Grant Number R315000074112/13 |
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