The Opacity Risk Premium in Private CDS-Bond Bases

This paper investigates the cross-sectional and time series variation in the CDS-Bond basis, while untangling their ownership. On average the basis of private companies is 62bps higher than for comparable firms that are publicly traded. This positive difference results from a relatively less overpriced CDS value compared to their bonds. Parallel to this, using IPO and delisting events I show that the opacity of the firm matters, resulting in a premium for private firms of 14% to 30% higher than for their public counterparts, around 24bps to 64bps. This additional risk makes trading on their bases more challenging in benign periods, when their CDSs are underpriced, simultaneously such negative basis opportunities vanish faster in times of crises