Nonlinearities in CDS-Bond Basis (CDS-Bono Farkinin Dogrusal Olmayan Duzeltme Hareketi)

Kurmaş Akdoğan and Meltem Chadwick

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

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. We explore the presence of a mean-reverting behavior in this difference (CDS-bond basis), for selected emerging markets, employing alternative threshold models (TAR, TAR-GARCH and ESTAR). Our results indicate a positive relationship between the speed of adjustment and the trading frequency of the sovereign CDS�s and bonds. The TAR-GARCH model suggests that the adjustment of the CDS-bond basis is immediate for economies with more liquid CDS�s and bonds, such as Argentina, Brazil and Mexico. The ESTAR model indicates that the adjustment displays a gradual pattern for the basis of the economies with less frequently traded bonds and CDS�s.

Keywords: CDS-bond Basis; Nonlinear Adjustment (search for similar items in EconPapers)
JEL-codes: C32 G12 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1113

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