The Term Structure of Currency Carry Trade Risk Premia

Andreas Stathopoulos, Adrien Verdelhan () and Hanno Lustig
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Andreas Stathopoulos: University of Southern California
Hanno Lustig: Anderson School of Business

No 837, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: We find that average returns to currency carry trades decrease signicantly 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.

Date: 2014
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: The Term Structure of Currency Carry Trade Risk Premia (2017)
Working Paper: The Term Structure of Currency Carry Trade Risk Premia (2013)
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