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The CDS-bond basis arbitrage and the cross section of corporate bond returns
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Kim, Gi Hyun, Li, Haitao and Zhang, Weina (2017) The CDS-bond basis arbitrage and the cross section of corporate bond returns. Journal of Futures Markets, 37 (8). pp. 836-861. doi:10.1002/fut.21845 ISSN 0270-7314.
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Official URL: http://doi.org/10.1002/fut.21845
Abstract
We provide a comprehensive empirical analysis on the implication of CDS-Bond basis arbitrage for the pricing of corporate bonds. Basis arbitrageurs introduce new risks such as funding liquidity and counterparty risk into the corporate bond market, which was dominated by passive investors before the existence of credit default swap (CDS). We show that a basis factor, constructed as the return differential between LOW and HIGH quintile basis portfolios, is a superior empirical proxy that captures the new risks. In the cross section of investment grade bond returns, the basis factor carries an annual risk premium of about 3% in normal periods.
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): | Credit derivatives, Swaps (Finance), Default (Finance), Corporate bonds, Arbitrage | ||||||||
Journal or Publication Title: | Journal of Futures Markets | ||||||||
Publisher: | John Wiley & Sons, Inc. | ||||||||
ISSN: | 0270-7314 | ||||||||
Official Date: | August 2017 | ||||||||
Dates: |
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Volume: | 37 | ||||||||
Number: | 8 | ||||||||
Page Range: | pp. 836-861 | ||||||||
DOI: | 10.1002/fut.21845 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Date of first compliant deposit: | 4 January 2017 | ||||||||
Date of first compliant Open Access: | 23 February 2019 | ||||||||
Funder: | Singapore. Ministry of Education | ||||||||
Grant number: | R315000074112/133 |
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