The Term Structure of Currency Carry Trade Risk Premia

Hanno Lustig, Andreas Stathopoulos and Adrien Verdelhan

American Economic Review, 2019, vol. 109, issue 12, 4142-77

Abstract: Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases. Across developed countries, the local currency term premia, which increase with the maturity of the bonds, offset the currency risk premia. Similarly, in the time-series, the predictability of foreign bond returns in dollars declines with the bonds' maturities. Leading no-arbitrage models in international finance do not match the downward term structure of currency carry trade risk premia. We derive a simple preference-free condition that no-arbitrage models need to reproduce in the absence of carry trade risk premia on long-term bonds.

JEL-codes: E43 G12 G15 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20180098
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Citations: View citations in EconPapers (30)

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