Abstract

http://ssrn.com/abstract=2340547
 
 

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Nominal Exchange Rate Stationarity and Long-Term Bond Returns


Hanno N. Lustig


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

Andreas Stathopoulos


University of Washington

Adrien Verdelhan


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

January 2016


Abstract:     
We derive a novel test for nominal exchange rate stationarity that exploits the forward-looking information in long maturity bond prices. When nominal exchange rates are stationary, no arbitrage implies that the return on the foreign long bond expressed in dollars is identical to the return on the U.S. bond. In the data, we do not find significant differences in long-term government bond risk premia in dollars across G10 countries, contrary to the large differences in risk premia at short maturities documented in the FX carry trade literature. Moreover, in most of the cases examined, 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: 88

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


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Date posted: October 16, 2013 ; Last revised: January 17, 2016

Suggested Citation

Lustig, Hanno N. and Stathopoulos, Andreas and Verdelhan, Adrien, Nominal Exchange Rate Stationarity and Long-Term Bond Returns (January 2016). 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 Washington ( email )
Seattle, WA 98195
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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