Inter-Market Basis Relations

Christopher L. Culp (), Andria van der Merwe () and Bettina J. Stärkle ()
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Christopher L. Culp: Johns Hopkins University
Andria van der Merwe: Johns Hopkins University
Bettina J. Stärkle: Compass Lexecon

Chapter Chapter 11 in Credit Default Swaps, 2018, pp 219-248 from Palgrave Macmillan

Abstract: Abstract No-arbitrage relationships characterize relative prices of credit default swaps (“CDSs”) vis-à-vis bonds and equities issued by the same reference entities. We review the empirical academic literature on which of the three markets is the Primary Price Discovery Market (“PPDM”) and find that CDS spreads lead corresponding cash bond prices in price discovery. The PPDM is more empirically ambiguous when comparing CDSs and equities. We also review the empirical evidence on the impact of the introduction of CDSs on bond and equity markets’ liquidity, which broadly demonstrates that the introduction of single-name CDS trading initially has adverse impacts on the liquidity of related debt and equity markets, but that those effects are transitory and may be later reversed as the related markets reach a joint equilibrium.

Keywords: Credit default swap; CDS; CDS-bond basis; Primary price discovery market; Impact of CDSs; Market liquidity; Volatility; CDSs and equities; CDSs and bonds (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:pal:psircp:978-3-319-93076-3_11

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DOI: 10.1007/978-3-319-93076-3_11

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