Term Structure of Hedging Premia and Basis Arbitrages in Synthetic-Cash Credit Market

This paper investigates the price formation of credit risk premia across European sovereign countries. A metric of such premia is retrieved under the statistical measure using bootstrap techniques on hedging portfolios. This latter is retrieved in the cash-synthetic market by means of comparison to standard credit spreads vis-à-vis Germany. Price discovery is then analyzed in a VECM setting by means of lead-lag analysis. Discrepancies between the two credit metrics induces the CDS-bond basis, here defined as the spread of a benchmark rate on target hedged position. The basis is explained across a panel of four core and four non-core countries using idyosincratic and common regressors. The retrieved unobserved fixed effects are then used as a metric for liquidity premia