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http://ssrn.com/abstract=2340547
 
 

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The Term Structure of Currency Carry Trade Risk Premia


Hanno N. Lustig


UCLA - Anderson School of Management; 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)

May 12, 2014


Abstract:     
We find that average returns to currency carry trades decrease significantly as the maturity of the foreign bonds increases, because investment currencies tend to have small local bond term premia. The downward term structure of carry trade risk premia is informative about the temporal nature of risks that investors face in currency markets. We show that long-maturity currency risk premia only depend on the domestic and foreign permanent components of the pricing kernels, since transitory currency risk is automatically hedged by interest rate risk for long-maturity bonds. Our findings imply that there is more cross-border sharing of permanent than transitory shocks.

Number of Pages in PDF File: 81

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

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Date posted: October 16, 2013 ; Last revised: May 13, 2014

Suggested Citation

Lustig, Hanno N. and Stathopoulos, Andreas and Verdelhan, Adrien, The Term Structure of Currency Carry Trade Risk Premia (May 12, 2014). Available at SSRN: http://ssrn.com/abstract=2340547 or http://dx.doi.org/10.2139/ssrn.2340547

Contact Information

Hanno N. Lustig (Contact Author)
UCLA - Anderson School of Management ( email )
405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States
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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