Department of Mathematical Sciences / Institutionen för matematiska vetenskaper

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Exploring a proxy to the CDS-Bond basis
(2013-06-20) Alfelt, Gustav; University of Gothenburg/Department of Mathematical Science; Göteborgs universitet/Institutionen för matematiska vetenskaper
This thesis investigates the behaviour of the CDS-bond basis dur- ing and after the 2008 nancial crisis. It is found that the basis plunges deep into negative territory and that the theory of a zero CDS-bond basis is severly violated, not only during the crisis, but also in the subsequent years. Neither does it seem to return to the positive and less volatile levels observed before the crisis. Further it is investigated how an investor would have fared using CDS prices as bond risk proxy during the period, revealing an evident underestimation of risk in the proxy. Last a new proxy is constructed using linear regression models. The purpose of these model is to enable an investor to assess the risky- ness of a bond that lacks reliable historical data by estimating the risk of the proxy in terms of Value at risk-quantities.