Study of Consistency of Bond and CDS Quotes

Marat Kurbangaleev (), Victor Lapshin and Sergey Smirnov
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Marat Kurbangaleev: National Research University Higher School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: In this paper, we study the consistency of bonds and CDS quotes data within a widely accepted credit risk pricing framework, allowing for non-trivial term structures of risk-free interest rates and default intensities. We propose an approach to test this consistency and a procedure to deal with inconsistencies. Our approach is model-independent and does not rely on any term structure fitting method. It also allows us to assess the precision of constructing risk-free yield term structure can be estimated for a given bond and CDS quotes set. We apply the proposed approach to euro zone sovereign bond and CDS data, and demonstrate that, in general, bond/CDS quotes are typically inconsistent across issuers and require filtration. However, our findings suggest grouping the euro zone sovereign issuers according to the group-level internal consistency

Keywords: feasibility band; data consistency; risk-free interest rates; term structure of credit spreads; sovereign default risk; euro zone; defaultable bond; credit default swa (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2015
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Published in WP BRP Series: Financial Economics / FE, April 2015, pages - 23

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