Basis to theoretical

The difference between the spread of a based on its traded price and the weighted average of the spreads of the individual credits included in the index. The greater liquidity of credit indices compared to single name credit default swaps means that index spreads tend to react more quickly to changes in market sentiment than single name spreads. This means that the basis often acts as a forward indicator of the direction of the market. When the market price of an index is higher than its theoretical value it is said to trade with a positive basis to theoretical. When the index price is lower than the average of the single names, the basis is said to be negative. A positive basis tends to be driven by market participants looking to buy protection, and therefore typically reflect a bearish view on credit spreads. A negative basis tends to be the result of more protection sellers than protection buyers, indicating a positive view on credit spreads.