The CDS-Bond Basis During the Financial Crisis of 2007–2009
Coauthor(s): Jenny Bai.
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We investigate both the time-series and cross-sectional variation in the CDS-bond basis, which measures
the difference between the CDS spread and cash-bond implied credit spread, for a large sample of individual
firms during the financial crisis. We test several possible explanations for the violation of the arbitrage
relation between cash bond and CDS contract that would, in normal conditions, drive the basis to zero.
Our findings do not uncover a clear single explanatory factor for the anomaly. Rather they point towards
several drivers related to funding risk, counterparty risk and collateral quality that force the individual
bond basis into negative territory at different phases of the crisis.
Source: Working Paper
Bai, Jenny, and Pierre Collin-Dufresne. "The CDS-Bond Basis During the Financial Crisis of 2007–2009." Working Paper, Columbia Business School, December 13, 2011.