Abstract
ABSTRACTWe test the parity relation for two credit prices of the Korean sovereign bond, and investigate the time-varying property of the basis of the CDS premium from the bond spread. Both the global and country-specific risks are responsible for explaining the variation in the CDS premium. The unexplained variation in the CDS premium is, in turn, significantly associated with the time-varying CTD option value. Given our empirical findings, an emerging government ought to be cautious when it comes to issuing sovereign bonds with large CTD option value because the CTD bond could render its CDS premium unnecessarily high.
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