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Credit default swaps and CDS-bond basis with Russian companies: a review and an analysis of the effects of the short selling ban during the second great contraction

Author

Listed:
  • Frolova, Elvina

    (National Research University Higher School of Economics)

  • Fantazzini, Dean

    (Moscow School of Economics, Moscow State University; National Research University Higher School of Economics)

Abstract

This paper reviews the theory of Credit Default Swaps (CDS), the main characteristics of the CDS market, and how to estimate the non-default component of the yield spreads as the basis between the actual CDS premium and the hypothetical CDS premium implied by bond yields. We then analyze the most liquid CDS on Russian companies and compute the relative CDS-Bond basis from 2005 till 2010, paying particular attention to the period when a short selling ban was into effect in Russian financial markets from September 18, 2008 till June 15, 2009. We found that, while the basis was mainly negative before the ban, it then became largely positive during the period the ban was enforced. After the ban was lifted, the basis has started to decrease but still remains positive for all companies examined. This evidence therefore seems to support the hypothesis that a positive basis can be justified by the difficulty of arbitrage caused by short selling costs.

Suggested Citation

  • Frolova, Elvina & Fantazzini, Dean, 2012. "Credit default swaps and CDS-bond basis with Russian companies: a review and an analysis of the effects of the short selling ban during the second great contraction," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 25(1), pages 3-24.
    • Handle: RePEc:ris:apltrx:0161
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    References listed on IDEAS

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    Cited by:

    1. Yan Yan & Zhewen Liao & Xiaosong Chen, 2018. "Fixed-income securities: bibliometric review with network analysis," Scientometrics, Springer;Akadémiai Kiadó, vol. 116(3), pages 1615-1640, September.

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    More about this item

    Keywords

    credit; default swaps; basis; short selling; emerging markets; Russian market; credit risk; Russian stocks;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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