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Consistent CDS-Bond Basis Measures from Bond-Implied CDS Curves

Article arXiv papers · Author: Arthur M. Berd et al.
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Summary

This installment in a credit term-structure series develops relative-value measures for trades comparing credit default swaps with cash bonds. It derives a bond-implied CDS term structure from fitted survival-rate curves and uses that curve to define a consistent CDS-bond basis across maturities. The document argues that this approach is preferable to relying on conventional Z-spread or Libor option-adjusted spread measures for this purpose.

It also outlines simplified hedging and trading strategies intended to exploit relative value across the maturity ranges of cash and synthetic credit markets. The excerpt describes the framework and its intended use, but provides no empirical results, worked examples, calibration details, or discussion of implementation risks. Its claims therefore summarize a proposed measurement and trading approach rather than evidence that the strategies deliver profitable outcomes.

Key ideas

  • A bond-implied CDS term structure can be derived from fitted survival-rate curves.
  • The resulting basis measure is designed to compare cash bonds and CDS consistently across maturities.
  • The authors argue this measure improves on conventional Z-spread and Libor OAS comparisons.
  • Simplified hedging and trading approaches are proposed for relative value across cash and synthetic credit markets.
  • The excerpt provides no empirical performance evidence or detailed implementation guidance.

Tags

Fixed incomeArbitrageDerivatives pricingRisk management
Full text
# Defining, Estimating and Using Credit Term Structures. Part 3: Consistent CDS-Bond Basis


# Defining, Estimating and Using Credit Term Structures. Part 3: Consistent CDS-Bond Basis









In the third part of this series we introduce consistent relative value measures for CDS-Bond basis trades using the bond-implied CDS term structure derived from fitted survival rate curves. We explain why this measure is better than the traditionally used Z-spread or Libor OAS and offer simplified hedging and trading strategies which take advantage of the relative value across the entire range of maturities of cash and synthetic credit markets.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.