The sovereign CDS-Bond basis: From a crisis perspective

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

This work studies the determinants of the sovereign CDS-bond basis distortions, in the Euro area, during the last crises period. Regression analysis showed four relevant conclusions. Credit rating and credit outlook downgrades have a huge impact on the sovereign credit instruments premiums, although not originating arbitrage opportunities. Moreover, the ECB rate has a smoother effect on the sovereign debt markets’ functioning and the risk-transfer balance between the state and the financial sector seems to have shifted from one crisis period to the other. Finally, markets’ liquidity is the most powerful force in driving arbitrage opportunities in the sovereign debt market.