The basis determinants

: the european case

Abstract

With subprime mortgage crisis, Lehman Brothers Holdings Inc. bankruptcy and European government credit crisis, the CDS market assisted to a generalized turmoil, contributing for a decrease of CDS market in more than 50% in less than 3 years. This dissertation focuses on testing possible determinants of the basis spread for several European companies, analysing data between June 18 2008 and December 31 2012. All financial information and data used in this thesis was gathered from Bloomberg. Literature on single-name credit modelling and valuing credit derivatives is revised and applied to calculate the basis, with special focus on estimating hazard rates, where we used the optimization method instead of the generally used bootstrap method. We than, followed Zhu work and analysed the proposed determinants for the basis, updating his work by introducing two new variables as potential determinants of the basis: the CDS Big Bang and the Lehman Brothers bailout. Finally, we have found some evidence that efforts to standardize and regulate the credit derivative contracts, the CDS Big Bang has contributed to mitigate part of the counterpart risk, and that have also been reflected on the CDS-ASW basis.

Date of Award	3 Jun 2013
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Joaquim Cadete (Supervisor)