Nominal Exchange Rate Stationarity and Long-Term Bond Returns
Hanno N. Lustig
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
University of Southern California - Marshall School of Business
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
August 1, 2015
When markets are complete, exchange rates correspond to the ratio of domestic and foreign pricing kernels. When the martingale components of the pricing kernels are the same across countries and exchange rates are stationary, long-term bond returns, once converted in the same currency, should be the same across countries. In the data, we do not find significant differences in long-term government bond risk premia in dollars across G10 countries. Moreover, in 60% of our rolling windows, we cannot reject that realized foreign and domestic long-term bond returns in dollars are the same, as if nominal exchange rates were stationary in levels, contrary to the academic consensus.
Number of Pages in PDF File: 84
Keywords: exchange rate stationarity, carry trade, UIP, currency risk premia, bond risk premia
Date posted: October 16, 2013 ; Last revised: September 3, 2015
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