Trading the bond-CDS basis: The role of credit risk and liquidity

We analyze trading opportunities that arise from differences between the bond and the CDS market. By simultaneously entering a position in a CDS contract and the underlying bond, traders can build a default-risk free position that allows them to repeatedly earn the difference between the bond asset swap spread and the CDS, known as the basis. We show that the basis size is closely related to measures of company-specific credit risk and liquidity, and to market conditions. In analyzing the aggregate profits of these basis trading strategies, we document that dissolving a position leads to significant profit variations, but that attractive risk-return characteristics still apply. The aggregate profits depend on the credit risk, liquidity, and market measures even more strongly than the basis itself, and we show which conditions make long and short basis trades more profitable. Finally, we document the impact of the financial crisis on the profits of long and short basis trades, and show that the formerly more profitable long basis trades experienced stronger profit decreases than short basis trades. --bond asset swap spreads,CDS premia,basis trading profits,credit risk,liquidity,fixed-effects,vector error correction model

A COMMODITY MARKET SIMULATION GAME FOR TEACHING MARKET RISK MANAGEMENT

The Market Risk Game is a computerized simulation game available for IBM PC and Apple II microcomputers that is designed to give realistic practice in making decisions in a risky market environment. It illustrates the use of hedging and put options to reduce risk in livestock and grain markets. It is best suited for individuals who have a basic understanding of commodity trading, but who need experience to solidify their knowledge to a functional level. Through the game this is done without facing the risk of an actual investment or requiring the time involved in watching a market over an extended period.Risk and Uncertainty,

A METHODOLOGY FOR ESTIMATING INTEGRATED FORECASTING/DECISION MODEL PARAMETERS USING LINEAR PROGRAMMING

A linear programming algorithm is used to estimate the parameters of a wheat storage decision model. This approach allows objective functions other than minimization of error squared to be used. It is demonstrated that by using a profit maximization objective function, an improved wheat storage decision model can be developed.Crop Production/Industries,

AN ANALYSIS OF THE IMPACT OF ALTERNATIVE PEANUT MARKETING QUOTAS AND SUPPORT PRICES

Demand and Price Analysis, Marketing,

ECONOMIC HOMOGENEITY OF GRADE CLASSIFICATIONS UNDER THE NEW AND OLD FEEDER CATTLE GRADING SYSTEMS

Livestock Production/Industries,

QUALITY OF PROFESSIONAL LIFE: FACULTY COMPENSATION AND APPOINTMENTS

The average real salary of agricultural economists has risen approximately 20 percent over the last two decades. Currently agricultural economists' salaries are approximately 6 percent above the average college of agricultural salary and 1 percent above the average of all university faculty. Over the last two decades agricultural economists' salaries have remained among the highest in the college of agriculture and their numbers have risen as a percentage of total agricultural faculty. Conversely our profession, and the college of agriculture in general, has experienced declines in salary levels and faculty numbers relative to average university salaries and total faculty numbers.Agricultural economics, Appointments, Faculty, Salaries, Teaching/Communication/Extension/Profession,