Currency Dependent Differences in Credit Spreads of Eur and Usd Denominated Foreign Currency Government Bonds

Can the credit spreads of one and the same issuer differ in two different currencies? If so, can an investor exploit this situation? To answer these questions and to add to the existing literature, we extend the Jarrow/Turnbull model with a second currency and test these theoretical results with an extensive empirical study. As a major result we discovered that the credit spreads, and therefore the cumulated implied default probabilities of nearly all bonds denominated in USD in comparison to EUR denominated bonds, are significantly higher for all terms. As the results could largely be explained by the dependence between event of default and exchange rate, an investor cannot therefore profit from this fact and the findings of the empirical study lend support to the validity of the paradigm of the efficient market hypothesis