Abstract

http://ssrn.com/abstract=2340547
 
 

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The Term Structure of Currency Carry Trade Risk Premia


Hanno N. Lustig


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

Andreas Stathopoulos


University of Southern California - Marshall School of Business

Adrien Verdelhan


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

March 1, 2015


Abstract:     
High interest rate currencies yield high currency excess returns on short-term Treasury bill investments, but they tend to yield low local excess returns on long-term government bonds. At longer maturities, the low term premium offsets the high currency risk premium. In the absence of arbitrage opportunities, this exact result obtains when the martingale components of the pricing kernels are the same across countries. In this case, exchange rates are stationary and uncovered interest rate parity holds at long horizons. We derive parametric restrictions to match the downward sloping term structure of carry trade risk premia in multi-country affine term structure models.

Number of Pages in PDF File: 83

Keywords: carry trade, UIP, currency risk premia, bond risk premia


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Date posted: October 16, 2013 ; Last revised: April 8, 2015

Suggested Citation

Lustig, Hanno N. and Stathopoulos, Andreas and Verdelhan, Adrien, The Term Structure of Currency Carry Trade Risk Premia (March 1, 2015). Available at SSRN: http://ssrn.com/abstract=2340547 or http://dx.doi.org/10.2139/ssrn.2340547

Contact Information

Hanno N. Lustig (Contact Author)
Stanford Graduate School of Business ( email )
Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Andreas Stathopoulos
University of Southern California - Marshall School of Business ( email )
701 Exposition Blvd
Los Angeles, CA 90089
United States
Adrien Verdelhan
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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