How the emerging markets are affected during crisis? An empirical research of the CDS Basis through

In this research we calculated the PECS (Par Equivalent CDS Spread) of 18 emerging market countries, and we produce a descriptive research of the CDS basis during the crisis. The PECS is a measure of the credit worthiness of a bond, used to compare the bonds Z-spread curve with the CDS instruments. Z-spread and CDS spreads are similar for low yield Bonds priced close to par; however, they dier for high yield bonds, or bonds priced far from par. The PECS Basis is the dierence between the CDS spreads and the PECS (CDS􀀀PECS).

Equivalent to the standard basis (CDS - Z-spread), it represents the divergence between risk proles of the CDS curve and the Bond curve with an appropriate methodology. The market PECS is calculated using a numerical optimisation method that minimise the dierence between the price of the bond using a proposed PECS Curve and the bond market price.The fair PECS model is a proprietary model derived using the reduced form model of Duffie and Singleton (1999) where the Survival Probability function is provided through the Term Structure Model of ?. The fitted discount function is similar to Vasicek and Fong (1998) model.

To calculate the market PECS and the fair PECS, we produce a theoretical interest rate swap curve bootstrapping the market prices, using prices of USD short-term deposits (USD Libor), medium-term futures and medium and long-term swaps. A CDS curve is bootstrapped using the CDS market prices. The prices are only available up to 10 years long; we assume a at CDS curve beyond.