Journal of Credit Risk

Instant default, upfront concession and CDS index basis

Haiyun Zhang


To investigate the CDS index basis, we extend the upfront concession framework introduced by Reyfman and Ushakova. We introduce instant default as the fundamental driver for upfront concession and the CDS index basis, and derive the formulae for the instant default adjustment. For indices excluding distressed credits, the equilibrium CDS index basis is roughly proportional to the index level minus the index coupon rate. This suggests that the index level is a leading indicator for the index basis. We show that the history of the HVOL index level and its basis between March and July 2004 supports this assertion.

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