An official website of the European Union How do you know?      
European Commission logo
JRC Publications Repository Menu

An Analysis of Euro Area Sovereign CDS and their Relation with Government Bonds

cover
We compare the market pricing of euro area government bonds and the corresponding Credit Default Swaps (CDSs). In particular, we analyse the “basis” defined as the difference between the premium on the CDS and the credit spread on the underlying bond. Our sample of weekly data covers the period from January 2007 to December 2012 and contains several episodes of sovereign market distress. Overall, we observe a complex relationship between the derivatives market and the underlying cash market characterised by sizable deviations from the no-arbitrage relationship (i.e. basis equal to zero). We show that short-selling frictions explain the persistence of positive basis deviations while funding frictions explain the persistence of negative basis deviations which are observed for countries with weak public finances. Moreover, we show that the “flight-to-quality/liquidity” phenomenon in bond markets is a key driver of the large positive basis of better rated countries.
2016-01-05
ELSEVIER SCIENCE BV
JRC98138
0378-4266,   
http://www.sciencedirect.com/science/article/pii/S0378426615002988,    https://publications.jrc.ec.europa.eu/repository/handle/JRC98138,   
10.1016/j.jbankfin.2015.10.010,   
Language Citation
NameCountryCityType
Datasets
IDTitlePublic URL
Dataset collections
IDAcronymTitlePublic URL
Scripts / source codes
DescriptionPublic URL
Additional supporting files
File nameDescriptionFile type 
Show metadata record  Copy citation url to clipboard  Download BibTeX
Items published in the JRC Publications Repository are protected by copyright, with all rights reserved, unless otherwise indicated. Additional information: https://ec.europa.eu/info/legal-notice_en#copyright-notice