Revisiting the Credit Default Swap Basis

Abstract

This article considers latest developments and the most effective approach to calculate the cash-credit default swap basis. As that basis is a quantitative measure of relative value between cash and synthetic credit markets, any calculation methodology needs to compare like-for-like yield spreads. The author assesses the different methodologies that may be employed and concludes that the adjusted basis—which is the difference between the adjusted credit default swap (CDS) spread, or c-spread, and the cash bond z-spread—is the most effective measure of the basis. The adjusted CDS spread uses the synthetic market credit term structure to adjust cash bond market yields.

TOPICS: Credit default swaps, statistical methods, fundamental equity analysis