Synthetic versus Cash: Derivation and analysis of the CDS-Bond basis

In this thesis default swap spreads and cash bond spreads of European companies are compared, by analyzing the movement of the difference between the two spreads. We find a significant positive nonzero basis. The basis is not constant over time, with an average positive basis before the credit crisis and an average negative basis during the crisis. The existence of the basis is primarily caused by a lead-lag relationship between synthetic and cash credit markets. Default swap spreads lead in price discovery compared to bond spreads.