Abstract
We investigate the cross-sectional variation in the CDS-bond basis, which measures the difference between credit default swap spread and cash-bond implied credit spread. We test several explanations for the violation of the arbitrage relation between cash bond and CDS contract, which states that, in normal conditions, the basis should be zero. The evidence is consistent with 'limits to arbitrage' theories in that deviations are larger for bonds with higher frictions, as measured by trading liquidity, funding cost, counterparty risk, and collateral margin.
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