Article 

Cossin, Didier, Lu, Abraham,  Are European corporate bond and default swap markets segmented? : looking for arbitrage opportunities in credit markets
Journal of financial markets , 2008, 38 p.
Market prices of corporate bond spreads and of credit default swap (CDS) rates do not match each other closely. In this paper, the authors argue that the liquidity premium, the cheapest-to-deliver (CTD) option, and actual market segmentation explain the pricing differences, erasing what could have been arbitrage opportunities. Using European transaction data from Reuters and Bloomberg, we estimate the liquidity premium that is time-varying and firm-specific. The authors show that when time-dependent liquidity premiums are considered, some corporate bond spreads and CDS rates correlate much more closely than previous studies have shown. Those looking for arbitrage opportunities should thus pay attention to the liquidity premium. The authors also find that high equity volatility drives pricing differences that can be explained by the CTD option.

ISBN :
Keywords : CREDIT, BOND YIELDS, LIQUIDITY, STOCK OPTIONS, ARBITRAGE
Language : English
Storage : InfoDesk, InfoDesk
Issue : Not yet published

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