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The CDS-bond basis arbitrage and the cross section of corporate bond returns
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Liu, Haitao, Zhang , Weina and Kim, Gi Hyun (2009) The CDS-bond basis arbitrage and the cross section of corporate bond returns. Working Paper. UNSPECIFIED. (Unpublished)
An open access version can be found in: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 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. However, speculative grade bonds are not affected by the basis factor as they are not widely used in the basis arbitrage.
Item Type: | Working or Discussion Paper (Working Paper) | ||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Journal or Publication Title: | Social Science Research Network | ||||||
Official Date: | November 2009 | ||||||
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Institution: | University of Warwick | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Unpublished | ||||||
Access rights to Published version: | Open Access (Creative Commons) | ||||||
Open Access Version: |
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