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

Carolina Castagnetti

No 161, DEM Working Papers Series from University of Pavia, Department of Economics and Management

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)
Pages: 8 pages
Date: 2018-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0161.pdf (application/pdf)

Related works:
Journal Article: A novel approach for testing the parity relationship between CDS and credit spread (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pav:demwpp:demwp0161

Access Statistics for this paper

More papers in DEM Working Papers Series from University of Pavia, Department of Economics and Management Contact information at EDIRC.
Bibliographic data for series maintained by Alice Albonico ( this e-mail address is bad, please contact ).