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The focus of this paper is the theoretical arbitrage relationship between the Credit
Default Swaps and Corporate Bonds. We find that the arbitrage relationship tends to be
violated, creating short term opportunities for traders. Results of VECM suggest that the
difference in price of credit risk persists over time. This violation is explained by three
sets of factors: 1) firm-specific credit risk proxies, 2) bond and CDS liquidity and 3)
overall market conditions. Variables gain more explanatory power during the last
financial crisis.