CDS basis arbitrage
A systematic fixed income approach—CDS basis arbitrage—defined by explicit rules, testable on history, and fragile when costs or regimes change.
Overview
A credit default swap (CDS) is insurance against default on a bond. 102 The CDS price, known as the CDS spread, is a periodic (e.g., annual) premium per dollar of the insured debt.
CDS basis arbitrage sits in the Fixed Income chapter of the systematic catalog. On QUSXFI we treat it as a testable hypothesis: specify entries, exits, sizing, and costs—then ask whether edge survives out-of-sample scrutiny.
Discretionary traders often arrive at similar ideas intuitively; the quantitative version forces you to write the rule before you see the next bar. That discipline is what makes results reproducible—or exposes them as luck.
Based on the research catalog 151 Trading Strategies (Kakushadze & Serur, 2018), section 5.14. Educational summary—not a replication of the full formal definition.
How the Strategy Works
CDS basis arbitrage in Fixed Income is defined by explicit positions and transition rules—translate each clause into code or a checklist.
The published definition of CDS basis arbitrage (catalog §5.14) specifies when exposure changes; discretionary overrides invalidate systematic claims.
Implementation and Research Process
Stress CDS basis arbitrage with parallel and twist shocks, not only historical replay.
Decompose CDS basis arbitrage into signal, portfolio construction, and execution modules—each must be path-independent given the same historical tape.
Log regime tags beside CDS basis arbitrage performance slices—vol level, rate cycle, liquidity stress.
Risk: What Breaks This Strategy
Duration and convexity on CDS basis arbitrage overwhelm small spread edges when rates gap on CPI or central bank surprises.
Credit spreads are correlated in stress—diversification across issuers is partial, not promised.
Roll and repo financing can invert carry trades overnight.
Common Mistakes to Avoid
- Omitting repo financing from CDS basis arbitrage carry calculations.
- Ignoring convexity on CDS basis arbitrage when rates gap—duration alone is not the risk.
- Confusing this educational CDS basis arbitrage summary with compliance-approved investment advice.
- Stacking CDS basis arbitrage with correlated sidebar strategies without netting exposures.
How to Study This Strategy
- Run a paper book on CDS basis arbitrage for a full signal cycle; export trades and tag regimes manually.
- List every data field CDS basis arbitrage needs in Fixed Income; verify point-in-time integrity.
- Restate CDS basis arbitrage (§5.14) as numbered rules another researcher could implement cold.
- Add conservative costs to CDS basis arbitrage; rerun with 2× spreads and compare drawdown paths.
- Write a one-page CDS basis arbitrage failure memo: three break modes and early warning signs.
Key Takeaways
- CDS basis arbitrage embeds duration, convexity, and spread risk—small carry edges vanish on one rates gap.
- Curve shape and roll-down assumptions for CDS basis arbitrage must match the live roll calendar, not a smooth back-adjusted series.
- Repo and financing can invert carry trades overnight.
- Policy surprises dominate P&L more often than micro relative-value tweaks.
- Stress CDS basis arbitrage with parallel and twist shocks, not only historical replay.
Learning Tip
File a dated note after each CDS basis arbitrage paper session: what worked, what broke, what you will not override next time.
Explore related strategies in the sidebar or return to the full catalog.