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 Washington

Adrien Verdelhan

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

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, 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)

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 )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,709
rank
8,469
Abstract Views
6,917
PlumX Metrics