The Term Structure of Currency Carry Trade Risk Premia

Hanno Lustig, Andreas Stathopoulos and Adrien Verdelhan ()
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Hanno Lustig: Stanford University
Andreas Stathopoulos: University of Washington

Research Papers from Stanford University, Graduate School of Business

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 as the maturity of the bonds increases. Leading no-arbitrage models in international finance cannot match the downward term structure of currency carry trade risk premia. While currency risk premia on short-term bonds reflect differences in transitory and permanent risk, we show that the premia on long-term bonds only reflect differences in the risk of permanent shocks to investors' marginal utility.

Date: 2017-10
New Economics Papers: this item is included in nep-ifn and nep-upt
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Related works:
Working Paper: The Term Structure of Currency Carry Trade Risk Premia (2014)
Working Paper: The Term Structure of Currency Carry Trade Risk Premia (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:repec:ecl:stabus:3411

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