Nonlinearities in CDS-Bond Basis (CDS-Bono Farkinin Dogrusal Olmayan Duzeltme Hareketi)
Kurmaş Akdoğan and
Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey
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 CDSï¿½s and bonds. The TAR-GARCH model suggests that the adjustment of the CDS-bond basis is immediate for economies with more liquid CDSï¿½s 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 CDSï¿½s.
Keywords: CDS-bond Basis; Nonlinear Adjustment (search for similar items in EconPapers)
JEL-codes: C32 G12 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1113
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