Currency Dependence of Corporate Credit Spreads

29 Pages Posted: 6 May 2003

See all articles by Rainer Jankowitsch

Rainer Jankowitsch

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Stefan Pichler

WU - Vienna University of Economics and Business - Department of Finance, Accounting and Statistics; VGSF (Vienna Graduate School of Finance)

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Date Written: March 2003

Abstract

Many pricing and risk management models need credit spread curves as an input. In the corporate bond market the estimation of credit spread curves is not trivial. Most issuers have only too few bonds outstanding and frequently these bonds are denominated in different currencies. To ensure a sufficient number of bonds for the estimation procedure in many cases bonds in different currencies have to be used which implies that the estimation procedure has to take into account potential currency effects. Under the hypothesis of zero correlation between the default variables and the exchange rates deflated by the relevant money market accounts we show using a rather general pricing framework that credit spreads are expected to be equal across different currencies. This paper analyses these effects and presents a new model which allows to estimate a credit spread curve for a single issuer with bonds in different currencies. This new model is based on the multi-curve estimation approach which allows a parsimonious joint estimation of a risk free term structure and the credit spread curve of the issuer. We reject the hypothesis of zero correlation between credit and exchange rate risk and present empirical evidence that there are significant differences of issuer specific credit spreads across different currencies in a representative sample of international corporate bonds. Moreover, this implies that dollar related credit spread curves cannot be used without special care for pricing defaultable claims denominated in other currencies.

Keywords: credit spreads, currency dependence, multi-curve estimation, corporate bonds

JEL Classification: G12, G13, G15, C13

Suggested Citation

Jankowitsch, Rainer and Pichler, Stefan, Currency Dependence of Corporate Credit Spreads (March 2003). Available at SSRN: https://ssrn.com/abstract=394521 or http://dx.doi.org/10.2139/ssrn.394521

Rainer Jankowitsch

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
Vienna, Vienna AT1020
Austria
+43 1 31 336 4340 (Phone)
+43 1 310 0580 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Stefan Pichler (Contact Author)

WU - Vienna University of Economics and Business - Department of Finance, Accounting and Statistics ( email )

Heiligenstaedter Strasse 46-48
Wien 1190
Austria

VGSF (Vienna Graduate School of Finance) ( email )

Heiligenstaedter Strasse 46-48
Vienna, 1190
Austria

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