The Term Structure of Currency Carry Trade Risk Premia
NBER Working Paper No. 19623
Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases. The local currency term premia, which increase with the maturity, offset the currency risk premia. The time-series predictability of foreign bond returns in dollars similarly declines with the bonds' maturities. Leading no-arbitrage models in international finance cannot match the downward term structure of currency carry trade risk premia. We derive a simple preference-free condition that no-arbitrage models need to satisfy to match the carry trade risk premia on long term bonds.
Document Object Identifier (DOI): 10.3386/w19623
Published: Hanno Lustig & Andreas Stathopoulos & Adrien Verdelhan, 2019. "The Term Structure of Currency Carry Trade Risk Premia," American Economic Review, vol 109(12), pages 4142-4177.
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