Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2025-05-30 
Number: 25-037/III
Author-Name: Yonas Khanna
Author-Workplace-Name: ING Bank
Author-Name: André Lucas
Author-Workplace-Name: Vrije Universiteit Amsterdam and Tinbergen Institute
Author-Name: Norman Seeger
Author-Workplace-Name: Vrije Universiteit Amsterdam and Tinbergen Institute
Title: Measuring and Explaining the CDS-Bond Basis Term-Structure Shape and Dynamics
Abstract: The CDS-bond basis quantifies the difference in risk premia between credit default swap (CDS) and bond markets. It is hard to measure at the individual firm level given substantial missing-value problems (30%-100%) in either or both markets, even for highly liquid blue-chip financial firms. We propose a novel imputation approach to obtain full historical firm-level basis term-structures across all maturities. Our approach can accommodate different term-structure interpolation methods, including Nearest-Neighbor, spline, and Nelson-Siegel interpolation. Using the new methodology, we construct the full history of the 2011-2021 JP Morgan (JPM) basis term-structure and use it to analyze its empirical determinants. We find that factors like market liquidity, funding liquidity, counterparty risk, and the default premium all impact the basis term-structure, though not all at the same moment in time. All factors are statistically significant during the Covid-19 pandemic. The various empirical limits-to-arbitrage proxies correlate differently with different parts of the basis term-structure, stressing the need to model the full basis term-structure rather than assuming it to be flat. The results are robust for other blue-chip financials, each time requiring the full basis term-structure imputation approach as proposed in this paper.
Classification-JEL: C32, C33, C58, G12, G32
Keywords: CDS-bond basis, missing value imputation, high-dimensional panel data, multi-curve modeling, time-varying spline interpolation, dynamic Nelson-Siegel, Kalman filter
File-URL: https://papers.tinbergen.nl/25037.pdf
File-Format: application/pdf
File-Size: 10.250.030 bytes
Handle: RePEc:tin:wpaper:20250037