A novel approach for testing the parity relationship between CDS and credit spread

Carolina Castagnetti

Economics Letters, 2018, vol. 172, issue C, 115-117

Abstract: We test the CDS-credit spread arbitrage by taking into account the presence of an unobserved common factor structure driving the movement in the prices. We examine 193 European CDS-Bond basis from January 2007 to December 2009. We estimate one and two common factors for the corporate bond spreads and the CDS premia, respectively. We address the issue of cross-member cointegration by adopting a novel approach. While standard cointegration techniques support the parity relation, the novel approach discards this hypothesis.

Keywords: Factor error structure; Cross-section dependence; Credit default swaps; Limit of arbitrage (search for similar items in EconPapers)
JEL-codes: C23 G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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Working Paper: A novel approach for testing the parity relationship between CDS and credit spread (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:172:y:2018:i:c:p:115-117

DOI: 10.1016/j.econlet.2018.08.023

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