NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Term Structure of Currency Carry Trade Risk Premia

Hanno Lustig, Andreas Stathopoulos, Adrien Verdelhan

NBER Working Paper No. 19623
Issued in November 2013, Revised in October 2017
NBER Program(s):AP, EFG, IFM

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.

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Document Object Identifier (DOI): 10.3386/w19623

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