Modeling credit risk - Currency dependence in global credit markets.

Spreads for credit instruments denominated in euros, sterling, and U.S. dollars over their local swap curves are examined here. The findings indicate that monthly spread changes were strongly currency-dependent during the period May 1999-May 2001. Sector-by-rating factor returns are at best weakly correlated across currencies, and U.S. dollar spread return are generally more volatile than the other two by a factor of two or three This is contrary to what would be expected from covered interest arbitrage. The conclusion is that analysts should estimate credit factor rise models separately in each market, as risk forecasting models using a single set of spread factors for different markets will not be accurate.