The Term Structure of Currency Carry Trade Risk Premia

113 Pages Posted: 16 Oct 2013 Last revised: 3 Nov 2018

See all articles by Hanno N. Lustig

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Andreas Stathopoulos

University of North Carolina (UNC) at Chapel Hill

Adrien Verdelhan

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

Abstract

Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases, because the local currency term premia offset the currency risk premia. The time series predictability of foreign bond returns in dollars similarly declines with the bonds' maturities. Leading no-arbitrage models in international finance cannot match the downward term structure of currency carry trade risk premia. To match these findings, we find that long-run U.I.P. has to hold on average in dynamic no-arbitrage asset pricing models.

Keywords: exchange rate stationarity, carry trade, UIP, currency risk premia, bond risk premia

Suggested Citation

Lustig, Hanno N. and Stathopoulos, Andreas and Verdelhan, Adrien and Verdelhan, Adrien, The Term Structure of Currency Carry Trade Risk Premia (October 2018). Available at SSRN: https://ssrn.com/abstract=2340547 or http://dx.doi.org/10.2139/ssrn.2340547

Hanno N. Lustig (Contact Author)

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Andreas Stathopoulos

University of North Carolina (UNC) at Chapel Hill ( email )

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Adrien Verdelhan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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