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The Credit Default Swap Basis by Moorad Choudhry

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CHAPTER 5

The CDS Basis II: Further Analysis of the Cash and Synthetic Credit Market Differential

In the previous chapter, we described the traditional method of calculating the credit default swap (CDS) basis. For accurate analysis, this is now regarded as misleading, especially when bond prices are trading above or below par. Investors often require more effective measures of the basis. In this chapter, we assess why the common measure of the basis is inappropriate in certain cases, before considering alternative measures that should better suit investors' purposes. We conclude that an adjusted Z-spread, based on default probabilities implied by credit default swap prices, is the best measure to use when calculating the basis.

Basis and Relative ...

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