The Term Structure of Currency Carry Trade Risk Premia
Name
aer.20180098.pdf
Description
Published version
Size
780.95 KB
Format
Adobe PDF
Checksum (MD5)
3e33a013aa2a63668f03d500b742f42f
Author(s)
Lustig, Hanno
Stathopoulos, Andreas
Verdelhan, Adrien
Date Issued
2019
Journal
American Economic Review
Publisher
American Economic Association
Version
Final published version
Abstract
© 2019 American Economic Association. All rights reserved. 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.
MIT Department
Sloan School of Management
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1257/AER.20180098
