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Nonlinearities in CDS-Bond Basis

Kurmaş Akdoğan and Meltem Chadwick

Emerging Markets Finance and Trade, 2013, vol. 49, issue 3, 6-19

Abstract: Theoretically, the risk premium captured by credit default swap (CDS) and bond yield spreads should be equal. However, data reveals a significant difference between the two spreads. The authors explore the presence of mean-reverting behavior in this difference (CDS-bond basis) in selected emerging markets, employing alternative threshold models (TAR, TAR-GARCH, and ESTAR). Their results indicate a positive relationship between the speed of adjustment and the trading frequency of sovereign CDSs and bonds.

Keywords: CDS-bond basis; nonlinear adjustment (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:mes:emfitr:v:49:y:2013:i:3:p:6-19