Biases in CDS Spreads after the CDS Big Bang

The ISDA CDS standard model assumes a single flat hazard rate (default intensity) rather than a term structure of hazard rates. This assumption introduces biases into CDS spreads for empirical research after the CDS Big Bang. This paper is the first to document the biases and provide a simple correction scheme. We quantify the biases using a large panel of CDS data for the period from April 2010 to October 2016. The correction is important for measures based on differences in CDS spreads, such as CDS-bond basis.