The Term Structure of Currency Carry Trade Risk Premia
American Economic Review
vol. 109,
no. 12, December 2019
(pp. 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.Citation
Lustig, Hanno, Andreas Stathopoulos, and Adrien Verdelhan. 2019. "The Term Structure of Currency Carry Trade Risk Premia." American Economic Review, 109 (12): 4142-77. DOI: 10.1257/aer.20180098Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- G12 Equities; Fixed Income Securities
- G15 International Financial Markets