The relationship of CDS spreads and Credit spreads - A comparison before and after the financial crisis
The relationship of CDS spreads and Credit spreads: A comparison before and after the financial crisis
Alagöz Fikret, 2012
Bachelor Thesis, Institute for Finance, HSW FHNW
Keywords: CDS spread, Credit spread, financial crisis, relationship
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CDS spreads and Credit spreads of bonds are both indicators of default risk but traded in different markets. Accordingly, it can be assumed that the CDS spread and credit spread show a similar behavior The overall objective of this thesis is to find out the relationship between the CDS market and the underlying bond market. Furthermore, the analysis compares the period before and after the outbreak of the financial crisis in 2008.
In a first step, an overview of CDS spreads and Credit spreads is demonstrated with some important information to understand the topic. Secondly, figures that are used and analyzed are illustrated in the section data description followed by some descriptive statistics. In a next step, a correlation and a regression analysis are conducted in order to find out the relationship between the two. Finally, a summary indicates the major findings as well as some recommendations for future analysis.
CDS spreads and Credit spreads show a stable development prior the financial crisis. Furthermore, the CDS-Bond basis is mainly positive prior the crisis and mainly negative afterwards. CDS spreads and Credit spreads are not highly correlated. Additionally, changes in CDS spreads are rarely explained by changes in Credit spreads. Further findings of the regression analyses is that CDS spreads became more sensitive to Credit spread changes after the financial crisis. Finally, CDS spreads overestimated the default risk prior the crisis and underestimated it afterwards.
Studiengang: Business Administration International Management (Bachelor)
Fachbereich der Arbeit: Accounting, Banking, Controlling and Finance