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

Author

Listed:
  • Kurmas Akdogan
  • Meltem Gulenay Chadwick

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.

Suggested Citation

  • Kurmas Akdogan & Meltem Gulenay Chadwick, 2011. "Nonlinearities in CDS-Bond Basis (CDS-Bono Farkinin Dogrusal Olmayan Duzeltme Hareketi)," Working Papers 1113, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:1113
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2011/11-13
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    More about this item

    Keywords

    CDS-bond Basis; Nonlinear Adjustment;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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