Measuring and Explaining the CDS-Bond Basis Term-Structure Shape and Dynamics

Yonas Khanna, André Lucas and Norman Seeger
Additional contact information
Yonas Khanna: ING Bank
André Lucas: Vrije Universiteit Amsterdam and Tinbergen Institute
Norman Seeger: Vrije Universiteit Amsterdam and Tinbergen Institute

No 25-037/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The CDS-bond basis quantifies the difference in risk premia between credit default swap (CDS) and bond markets. It is hard to measure at the individual firm level given substantial missing-value problems (30%-100%) in either or both markets, even for highly liquid blue-chip financial firms. We propose a novel imputation approach to obtain full historical firm-level basis term-structures across all maturities. Our approach can accommodate different term-structure interpolation methods, including Nearest-Neighbor, spline, and Nelson-Siegel interpolation. Using the new methodology, we construct the full history of the 2011-2021 JP Morgan (JPM) basis term-structure and use it to analyze its empirical determinants. We find that factors like market liquidity, funding liquidity, counterparty risk, and the default premium all impact the basis term-structure, though not all at the same moment in time. All factors are statistically significant during the Covid-19 pandemic. The various empirical limits-to-arbitrage proxies correlate differently with different parts of the basis term-structure, stressing the need to model the full basis term-structure rather than assuming it to be flat. The results are robust for other blue-chip financials, each time requiring the full basis term-structure imputation approach as proposed in this paper.

Keywords: CDS-bond basis; missing value imputation; high-dimensional panel data; multi-curve modeling; time-varying spline interpolation; dynamic Nelson-Siegel; Kalman filter (search for similar items in EconPapers)
JEL-codes: C32 C33 C58 G12 G32 (search for similar items in EconPapers)
Date: 2025-05-30
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papers.tinbergen.nl/25037.pdf (application/pdf)

Related works:
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:tin:wpaper:20250037

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().