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THE RELATIONSHIP BETWEEN CDS AND BOND SPREADS: LITERATURE DISCUSSION FROM A BIBLIOMETRIC PERSPECTIVE

Year 2023, , 15 - 39, 31.01.2023
https://doi.org/10.14783/maruoneri.1194979

Abstract

The importance of CDS and bond markets in terms of pricing of credit risk has led to the emergence of many studies on the equilibrium relationship between the two markets in the relevant literature. Although initial studies have suggested that there is mostly a long-term equilibrium relationship between both market basis, recent studies may reveal that there may be both short-term and long-term deviations from the equilibrium under the influence of different factors, that the lead-lag relationships in price discovery of relevant markets may differ, or that there may not be an equilibrium relationship between the markets. This study deals with the studies on the relationship between CDS and bond basis with a bibliometric approach due to the conflicting findings of the related literature and presents a comparative evaluation of these studies.

References

  • Acharya, V. V. & Johnson, T. C. (2007). Insider trading in credit derivatives. Journal of Financial Economics, 84(1), 110-141.
  • Adler, M. & Song, J. (2010). The behavior of emerging market sovereigns’ credit default swap premiums and bond yield spreads. International Journal of Finance and Economics, 15, 31-58.
  • Akdoğan, K. & Chadwick, M. G. (2015). Nonlinearities in CDS-bond basis. Emerging Markets Finance and Trade, 49 (3), 6-19.
  • Alexopoulou, I., Andersson, M. & Georgescu, O. M. (2009). An empirical study on the decoupling movements between corporate bond and CDS spreads. Working Paper Series 1085, 1-35.
  • Ammer, J. & Cai, F. (2011). Sovereign CDS and bond pricing dynamics in emerging markets: Does the cheapest-to-deliver option matter?. Journal of Financial Markets, Institutions&Money, 21, 369-387.
  • Andritzky, J. & Singh, M. (2006). The pricing of credit default swaps during distress. IMF Working Paper, 6, 254.
  • Anelli, M. & Patane, M. (2022). The role of CDS market in the price discovery process of the “PIIGS” countries sovereign credit risk during the recent decade of monetary easing. Journal of Finance and Investment Analysis, 11(1), 1-29.
  • Arce, O., Mayordomo, S. & Pena, J. I. (2013). Credit-risk valuation in the sovereign CDS and bonds markets: evidence from the euro area crisis. Journal of International Money and Finance, 35, 124-145.
  • Arora, N., Gandhi, P. & Longstaff, F. A. (2012). Counterparty credit risk and credit default swap markets. Journal of Financial Economics, 103-280-293.
  • Augustin, P. (2012). Squeezed everywhere: can we learn something new from the CDS-bond basis. Working Paper, McGill University.
  • Augustin, P. ve Schnitzler, J. (2020). Disentangling types of liquidity and testing limits-to-arbitrage theories in the CDS-bond Basis. European Financial Management, 27(1), 120-146.
  • Baba, N. & Inada, M. (2009). Price discovery of subordinated credit spreads for Japanese megabanks: evidence from bond and credit default swap markets. Journal of International Financial Markets, Institutions&Money, 19(4), 616-632.
  • Bai, J. & Collin-Dufresne, P. (2019), The CDS-bond basis. Financial Management, 48(2), 417-439.
  • Bhanot, K. & Guo, L. (2011), Types of liquidity and limits to arbitrage-the case of credit default swaps. The Journal of Futures Markets, 32(4), 301-329.
  • Blanco, R., Brennan, S. & Marsh, I. W. (2005). An empirical analysis of the dynamic relation between investment-grade bonds and credit default Sswaps. The Journal of Finance, 60(5), 2255-2281.
  • Bomfim, A. (2005). Understanding credit derivatives and related instruments (2. Baskı). San Diego: Elsevier Academic Press.
  • Bowe, M., Klimaviciene, A. & Taylor, A. P. (2009). Information transmission and price discovery in emerging sovereign credit risk markets. Working Paper, 1-36.
  • Carboni, A. & Carboni, A. (2012). The cash-CDS basis for sovereign countries: market strategy, price discovery and determinants. Journal of Governance and Regulation, 1(2), 49-71.
  • Castagnetti, C. (2018) Novel approach for testing the parity relationship between CDS and credit spread. Economic Letters, 172, 115-117.
  • Chalamandaris, G. & Pagratis, S. (2019). Limits to arbitrage and CDS-bond dynamics around the financial crisis. Journal of Empirical Finance, 54, 213-235.
  • Chan-Lau, J. A. & Kim, Y. S. (2004). Equity prices, credit Default Swaps, and bond spreads in emerging markets. IMF Working Paper, 04/27.
  • Choi, J. Sharchar, O. & Shin, S. S. (2019). Dealer liquidity provision and the breakdown of the law of one price: Evidence from the CDS-bond basis. Management Science, 65, 4100-4122.
  • Coudert, V. & Gex, M. (2010) Credit default swap and bond markets: Which leads the other?. Financial Stability Review, 14, 161-167.
  • Das, S., Kalimipalli, M. & Nayak, S. (2014). Did CDS trading improve the market for corporate bonds?. Journal of Financial Economics, 111, 495-525.
  • De Wit, J. (2006). Exploring the CDS-bond basis. Working Paper Research, 104, National Bank of Belgium.
  • Duffie, D. (1999). Credit swap valuation, Financial Analysts Journal, 55(1), 73-87.
  • Elizalde, A., Doctor, S. & Saltuk, Y. (2009). Bond-CDS basis handbook. J.P. Morgan Credit Derivatives Research.
  • Ericsson, J., Jacobs, K. & Oviedo, R. (2009). The determinants of Credit Default Swap Premia. Journal of Financial and Quantitative Analysis, 44(1), 109-132.
  • Feldhütter, P., Hotchkiss, E. & Karakaş O. (2016). The value of creditor control in corporate bonds. Journal of Financial Economics, 121(1), 1-27.
  • Foley-Fisher, N. (2010). Explaining sovereign bond-CDS arbitrage violations during the financial crisis 2008-09. Working Paper.
  • Fontana, A. (2010). The persistent negative CDS-bond basis during the 2007/08 financial crisis. Working Paper 2010-13, Venice: Department of Economics, University of Venice Ca’Foscari.
  • Fontana, A. & Scheicher, M. (2016). Analysis of euro area sovereign CDS and their relation with government bonds. Journal of Banking&Finance, 62, 126-140.
  • Forte, S. & Pena, J. I. (2009). Credit spreads: An empirical analysis on the informational content of stocks, bond, and CDS. Journal of Banking&Finance, 33(11), 2013-2025.
  • Garleanu, N. & Pedersen, L. H. (2011), Margin-based asset pricing and deviations from the law of one price. Review of Financial Studies, 24(6), 1980-2022.
  • Guesmi, S., Ben-Abdallah, R., Breton, M. & Dionne, G. (2019). The CDS-bond basis: negativity persistence and limits to arbitrage. Working Paper, Canada.
  • Gyntelberg, J., Hördahl, P., Ters, K. ve Urban, J. (2017). Arbitrage costs and the persistent non-zero CDS-bond basis: Evidence from intraday euro area sovereign debt markets. BIS Working Papers, Monetary and Economic Department.
  • Haddad, V., Moreira, A. & Muir, T. (2020). When selling becomes viral: Disruptions in debt markets in the COVID-19 crisis and Fed’s response. The Review of Financial Studies, 34(11), 5309-5351.
  • Hull, J. C. & White, A. D. (2000). Valuing credit default swaps 1: No counterparty default risk. Journal of Derivatives, 8(1), 29-40.
  • Hull, J., Predescu, M. & White, A. (2004). The relationship between credit default swap spreads, bond yields, and credit rating announcements. Journal of Banking&Finance, 28, 2789-2811.
  • Karabıyık, L. & Anbar, A. (2006). Kredi temerrüt swapları ve kredi temerrüt swaplarının fiyatlandırılması. Muhasebe ve Finansman Dergisi, 31, 0-0.
  • Kim G. H., Li, H. & Zhang, W. (2016). CDS-bond basis and bond return predictability. Journal of Empirical Finance, 38, 307-337.
  • Kim, G. H., Li, H. & Zhang, W. (2017). The CDS-bond basis arbitrage and the cross section of corporate bond returns. Journal of Futures Markets, 37(8), 836-861.
  • Küçük, U. N. (2010). Non-default component of sovereign emerging market yield spreads and its determinants: Evidence from credit default swap market. MPRA Paper 27428, University Library of Munich Germany.
  • Levy, A. (2009). The CDS-bond basis spread in emerging markets: liquidity and counterparty risk effects. Working Paper, 1-64.
  • Li, L. & Scrimgeour, F. (2021). The co-integration of CDS and bonds in time-varying volatility dynamics: Do credit risk swaps lower bond risks?. Studies in Nonlinear Dynamics&Econometrics, 1-23.
  • Lin, H., Man, K. & Wu, C. (2020). Price discovery and persistent arbitrage violations in credit markets. Financial Management, 1-27.
  • Longstaff F. A., Mithal, S. & Neis, E. (2005). Corporate yield spreads: Default risk or liquidity? New evidence from the credit default swap market. The Journal of Finance, 60(5), 2213-2253.
  • Longstaff, F. A. (2011). How sovereign is sovereign credit risk?. American Economic Journal: Macroeconomics, 3(2), 75-103.
  • McAdie, R. & O’Kane, D. (2001). Explaining the basis: Cash versus default swaps. Research Note, Lehman Brothers.
  • Mitchell, M. & Pulvino, T. (2012). Arbitrage crashes and the speed of capital. Journal of Financial Economics, 104, 469-490.
  • Nashikkar, A., Subrahmanyam, M. G. & Mahanti S. (2011). Liquidity and arbitage in the market for credit risk. The Journal of Financial and Quantitative Analysis, 46(3), 627-656.
  • Ngene, G. M., Benefield, P. & Lynch, A. K. (2017). Asymmetric and nonlinear dynamics in sovereign credit risk markets. Journal of Futures Markets, 38(5), 563-585.
  • Norden, L. & Weber, M. (2009). The co-movement of credit default swap, bond and stock markets: An empirical analysis. European Financial Management, 15(3), 529-562.
  • Palladini, G. & Portes, R. (2011). Sovereign CDS and bond pricing dynamics in the euro-area. NBER Working Paper Series 17586, The National Bureau of Economic Research.
  • Park, K. & Lee, S. (2016). An empirical study of CDS premium on the Korean sovereign bond: Some effect of the CTD option. Emerging Markets Finance and Trade, 53(4), 848-864.
  • Rooney, M. (1999). Credit default swap: Transferring corporate and sovereign credit risk. Derivative Credit Risk, Risk Books, London.
  • Shleifer, A. & Vishny, R. W. (1997), A survey of corporate governance, The Journal of Finance, 52(2), 737-783.
  • Tang, D. Y. & Yan, H. (2007). Liquidity and credit default swap spreads. AFA 2007 Chicago Meetings Paper, EFA.
  • Trapp, M. (2009). Trading the bond-CDS basis: The role of credit risk and liquidity. CFR Working Paper, No: 9-16.
  • Zhu, H. (2006). An empirical comparison of credit spreads between the bond market and the credit default swap market. Journal of Financial Services Research, 29, 211-235.

CDS VE TAHVİL MARJLARI İLİŞKİSİ: BİBLİYOMETRİK BİR BAKIŞ AÇISINDAN LİTERATÜR ARAŞTIRMASI

Year 2023, , 15 - 39, 31.01.2023
https://doi.org/10.14783/maruoneri.1194979

Abstract

CDS ve tahvil piyasalarının kredi riskinin fiyatlandırması açısından taşıdığı önem ilgili literatürde iki piyasa arasındaki denge ilişkisine yönelik çok sayıda çalışmanın ortaya çıkmasına yol açmıştır. İlk çalışmalar her iki piyasa marjları arasında çoğunlukla uzun vadeli denge ilişkisinin olduğunu ortaya koysa da, yakın zamanlı çalışmalar farklı faktörlerin etkisi altında dengeden gerek kısa gerekse uzun vadeli sapmalar olabileceğini, ilgili piyasaların fiyat keşfindeki öncül-ardıl ilişkilerinin farklılaşabileceğini veya piyasalar arasında bir denge ilişkisinin mevcut olmayabileceğini ortaya koymuştur. Bu çalışma, ilgili literatürün çelişkili bulguları itibariyle CDS ve tahvil marjları ilişkisine yönelik olan çalışmaları bibliyometrik bir yaklaşımla ele almakta ve bu çalışmalara ilişkin karşılaştırmalı bir değerlendirme sunmaktadır

References

  • Acharya, V. V. & Johnson, T. C. (2007). Insider trading in credit derivatives. Journal of Financial Economics, 84(1), 110-141.
  • Adler, M. & Song, J. (2010). The behavior of emerging market sovereigns’ credit default swap premiums and bond yield spreads. International Journal of Finance and Economics, 15, 31-58.
  • Akdoğan, K. & Chadwick, M. G. (2015). Nonlinearities in CDS-bond basis. Emerging Markets Finance and Trade, 49 (3), 6-19.
  • Alexopoulou, I., Andersson, M. & Georgescu, O. M. (2009). An empirical study on the decoupling movements between corporate bond and CDS spreads. Working Paper Series 1085, 1-35.
  • Ammer, J. & Cai, F. (2011). Sovereign CDS and bond pricing dynamics in emerging markets: Does the cheapest-to-deliver option matter?. Journal of Financial Markets, Institutions&Money, 21, 369-387.
  • Andritzky, J. & Singh, M. (2006). The pricing of credit default swaps during distress. IMF Working Paper, 6, 254.
  • Anelli, M. & Patane, M. (2022). The role of CDS market in the price discovery process of the “PIIGS” countries sovereign credit risk during the recent decade of monetary easing. Journal of Finance and Investment Analysis, 11(1), 1-29.
  • Arce, O., Mayordomo, S. & Pena, J. I. (2013). Credit-risk valuation in the sovereign CDS and bonds markets: evidence from the euro area crisis. Journal of International Money and Finance, 35, 124-145.
  • Arora, N., Gandhi, P. & Longstaff, F. A. (2012). Counterparty credit risk and credit default swap markets. Journal of Financial Economics, 103-280-293.
  • Augustin, P. (2012). Squeezed everywhere: can we learn something new from the CDS-bond basis. Working Paper, McGill University.
  • Augustin, P. ve Schnitzler, J. (2020). Disentangling types of liquidity and testing limits-to-arbitrage theories in the CDS-bond Basis. European Financial Management, 27(1), 120-146.
  • Baba, N. & Inada, M. (2009). Price discovery of subordinated credit spreads for Japanese megabanks: evidence from bond and credit default swap markets. Journal of International Financial Markets, Institutions&Money, 19(4), 616-632.
  • Bai, J. & Collin-Dufresne, P. (2019), The CDS-bond basis. Financial Management, 48(2), 417-439.
  • Bhanot, K. & Guo, L. (2011), Types of liquidity and limits to arbitrage-the case of credit default swaps. The Journal of Futures Markets, 32(4), 301-329.
  • Blanco, R., Brennan, S. & Marsh, I. W. (2005). An empirical analysis of the dynamic relation between investment-grade bonds and credit default Sswaps. The Journal of Finance, 60(5), 2255-2281.
  • Bomfim, A. (2005). Understanding credit derivatives and related instruments (2. Baskı). San Diego: Elsevier Academic Press.
  • Bowe, M., Klimaviciene, A. & Taylor, A. P. (2009). Information transmission and price discovery in emerging sovereign credit risk markets. Working Paper, 1-36.
  • Carboni, A. & Carboni, A. (2012). The cash-CDS basis for sovereign countries: market strategy, price discovery and determinants. Journal of Governance and Regulation, 1(2), 49-71.
  • Castagnetti, C. (2018) Novel approach for testing the parity relationship between CDS and credit spread. Economic Letters, 172, 115-117.
  • Chalamandaris, G. & Pagratis, S. (2019). Limits to arbitrage and CDS-bond dynamics around the financial crisis. Journal of Empirical Finance, 54, 213-235.
  • Chan-Lau, J. A. & Kim, Y. S. (2004). Equity prices, credit Default Swaps, and bond spreads in emerging markets. IMF Working Paper, 04/27.
  • Choi, J. Sharchar, O. & Shin, S. S. (2019). Dealer liquidity provision and the breakdown of the law of one price: Evidence from the CDS-bond basis. Management Science, 65, 4100-4122.
  • Coudert, V. & Gex, M. (2010) Credit default swap and bond markets: Which leads the other?. Financial Stability Review, 14, 161-167.
  • Das, S., Kalimipalli, M. & Nayak, S. (2014). Did CDS trading improve the market for corporate bonds?. Journal of Financial Economics, 111, 495-525.
  • De Wit, J. (2006). Exploring the CDS-bond basis. Working Paper Research, 104, National Bank of Belgium.
  • Duffie, D. (1999). Credit swap valuation, Financial Analysts Journal, 55(1), 73-87.
  • Elizalde, A., Doctor, S. & Saltuk, Y. (2009). Bond-CDS basis handbook. J.P. Morgan Credit Derivatives Research.
  • Ericsson, J., Jacobs, K. & Oviedo, R. (2009). The determinants of Credit Default Swap Premia. Journal of Financial and Quantitative Analysis, 44(1), 109-132.
  • Feldhütter, P., Hotchkiss, E. & Karakaş O. (2016). The value of creditor control in corporate bonds. Journal of Financial Economics, 121(1), 1-27.
  • Foley-Fisher, N. (2010). Explaining sovereign bond-CDS arbitrage violations during the financial crisis 2008-09. Working Paper.
  • Fontana, A. (2010). The persistent negative CDS-bond basis during the 2007/08 financial crisis. Working Paper 2010-13, Venice: Department of Economics, University of Venice Ca’Foscari.
  • Fontana, A. & Scheicher, M. (2016). Analysis of euro area sovereign CDS and their relation with government bonds. Journal of Banking&Finance, 62, 126-140.
  • Forte, S. & Pena, J. I. (2009). Credit spreads: An empirical analysis on the informational content of stocks, bond, and CDS. Journal of Banking&Finance, 33(11), 2013-2025.
  • Garleanu, N. & Pedersen, L. H. (2011), Margin-based asset pricing and deviations from the law of one price. Review of Financial Studies, 24(6), 1980-2022.
  • Guesmi, S., Ben-Abdallah, R., Breton, M. & Dionne, G. (2019). The CDS-bond basis: negativity persistence and limits to arbitrage. Working Paper, Canada.
  • Gyntelberg, J., Hördahl, P., Ters, K. ve Urban, J. (2017). Arbitrage costs and the persistent non-zero CDS-bond basis: Evidence from intraday euro area sovereign debt markets. BIS Working Papers, Monetary and Economic Department.
  • Haddad, V., Moreira, A. & Muir, T. (2020). When selling becomes viral: Disruptions in debt markets in the COVID-19 crisis and Fed’s response. The Review of Financial Studies, 34(11), 5309-5351.
  • Hull, J. C. & White, A. D. (2000). Valuing credit default swaps 1: No counterparty default risk. Journal of Derivatives, 8(1), 29-40.
  • Hull, J., Predescu, M. & White, A. (2004). The relationship between credit default swap spreads, bond yields, and credit rating announcements. Journal of Banking&Finance, 28, 2789-2811.
  • Karabıyık, L. & Anbar, A. (2006). Kredi temerrüt swapları ve kredi temerrüt swaplarının fiyatlandırılması. Muhasebe ve Finansman Dergisi, 31, 0-0.
  • Kim G. H., Li, H. & Zhang, W. (2016). CDS-bond basis and bond return predictability. Journal of Empirical Finance, 38, 307-337.
  • Kim, G. H., Li, H. & Zhang, W. (2017). The CDS-bond basis arbitrage and the cross section of corporate bond returns. Journal of Futures Markets, 37(8), 836-861.
  • Küçük, U. N. (2010). Non-default component of sovereign emerging market yield spreads and its determinants: Evidence from credit default swap market. MPRA Paper 27428, University Library of Munich Germany.
  • Levy, A. (2009). The CDS-bond basis spread in emerging markets: liquidity and counterparty risk effects. Working Paper, 1-64.
  • Li, L. & Scrimgeour, F. (2021). The co-integration of CDS and bonds in time-varying volatility dynamics: Do credit risk swaps lower bond risks?. Studies in Nonlinear Dynamics&Econometrics, 1-23.
  • Lin, H., Man, K. & Wu, C. (2020). Price discovery and persistent arbitrage violations in credit markets. Financial Management, 1-27.
  • Longstaff F. A., Mithal, S. & Neis, E. (2005). Corporate yield spreads: Default risk or liquidity? New evidence from the credit default swap market. The Journal of Finance, 60(5), 2213-2253.
  • Longstaff, F. A. (2011). How sovereign is sovereign credit risk?. American Economic Journal: Macroeconomics, 3(2), 75-103.
  • McAdie, R. & O’Kane, D. (2001). Explaining the basis: Cash versus default swaps. Research Note, Lehman Brothers.
  • Mitchell, M. & Pulvino, T. (2012). Arbitrage crashes and the speed of capital. Journal of Financial Economics, 104, 469-490.
  • Nashikkar, A., Subrahmanyam, M. G. & Mahanti S. (2011). Liquidity and arbitage in the market for credit risk. The Journal of Financial and Quantitative Analysis, 46(3), 627-656.
  • Ngene, G. M., Benefield, P. & Lynch, A. K. (2017). Asymmetric and nonlinear dynamics in sovereign credit risk markets. Journal of Futures Markets, 38(5), 563-585.
  • Norden, L. & Weber, M. (2009). The co-movement of credit default swap, bond and stock markets: An empirical analysis. European Financial Management, 15(3), 529-562.
  • Palladini, G. & Portes, R. (2011). Sovereign CDS and bond pricing dynamics in the euro-area. NBER Working Paper Series 17586, The National Bureau of Economic Research.
  • Park, K. & Lee, S. (2016). An empirical study of CDS premium on the Korean sovereign bond: Some effect of the CTD option. Emerging Markets Finance and Trade, 53(4), 848-864.
  • Rooney, M. (1999). Credit default swap: Transferring corporate and sovereign credit risk. Derivative Credit Risk, Risk Books, London.
  • Shleifer, A. & Vishny, R. W. (1997), A survey of corporate governance, The Journal of Finance, 52(2), 737-783.
  • Tang, D. Y. & Yan, H. (2007). Liquidity and credit default swap spreads. AFA 2007 Chicago Meetings Paper, EFA.
  • Trapp, M. (2009). Trading the bond-CDS basis: The role of credit risk and liquidity. CFR Working Paper, No: 9-16.
  • Zhu, H. (2006). An empirical comparison of credit spreads between the bond market and the credit default swap market. Journal of Financial Services Research, 29, 211-235.
There are 60 citations in total.

Details

Primary Language Turkish
Journal Section Makale Başvuru
Authors

Semra Bank 0000-0001-6485-4388

Elif Kahraman 0000-0002-8656-8873

Publication Date January 31, 2023
Published in Issue Year 2023

Cite

APA Bank, S., & Kahraman, E. (2023). CDS VE TAHVİL MARJLARI İLİŞKİSİ: BİBLİYOMETRİK BİR BAKIŞ AÇISINDAN LİTERATÜR ARAŞTIRMASI. Öneri Dergisi, 18(59), 15-39. https://doi.org/10.14783/maruoneri.1194979

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