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Explanation:
The correct answer is D because it is a false statement.
While the CDS market offers significant advantages over the cash bond market for estimating hazard rates—such as standard maturities (Option A), broad coverage (Option B), and higher liquidity (Option C)—CDS spreads are not driven entirely by fundamental credit risk. They are still highly subject to "technical" or market factors like supply/demand imbalances, liquidity conditions, and counterparty risks, which can result in significant spread volatility. Therefore, claiming that CDS prices exclude market/technical factors is incorrect.
308.2. According to Malz,³¹ the advantages of using the CDS market, instead of the cash bond market, to estimate hazard rates include each of the following EXCEPT, which is not an advantage?
A
Standardization: CDS trading occurs regularly in standardized maturities of 1, 3, 5, 7, and 10 years
B
Coverage: CDS spread curves exist for many corporate issuers
C
Liquidity: CDS often trade heavily with tighter bid-spread than bond issues
D
Fundamental: CDS are priced according to pure (fundamental) credit default risk, not on the market (aka, technical) factors, which will limit spread volatility
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