The Credit Default Swap Basis

CHAPTER 4

Supply and Demand and the Credit Default Swap Basis

In this chapter, we consider the impact of supply and demand across both the cash and synthetic markets and their impact on the basis. This serves to further illustrate the interaction between the two markets. We then discuss why the traditional asset-swap (ASW) method of measuring the basis may no longer be preferred, a theme explored to greater depth in Chapter 5.

One of the factors that impact the basis is supply and demand, in both cash and synthetic markets. For many reference names, there is greater liquidity in the synthetic market than in the cash market, which would tend to influence the basis into negative territory, but other factors push the basis the other way (see previous ...