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Currency Risk Premiums: A Multi-Horizon Perspective

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  • Mikhail Chernov
  • Magnus Dahlquist

Abstract

We review the literature on multi-horizon currency risk premiums. We show how the multi-horizon implications arise from the classic present-value relationship. We further show how these implications manifest themselves in the interaction between bond and currency risk premiums. This link is strengthened by explicitly accounting for stochastic discount factors. Information about currency risk premiums at different horizons presents a wealth of new evidence and challenges for existing models.

Suggested Citation

  • Mikhail Chernov & Magnus Dahlquist, 2023. "Currency Risk Premiums: A Multi-Horizon Perspective," Foundations and Trends(R) in Finance, now publishers, vol. 14(1), pages 1-60, November.
    • Handle: RePEc:now:fntfin:0500000069
    DOI: 10.1561/0500000069
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    References listed on IDEAS

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    1. Dimitri Vayanos & Jean‐Luc Vila, 2021. "A Preferred‐Habitat Model of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 89(1), pages 77-112, January.
    2. Irina Zviadadze, 2017. "Term Structure of Consumption Risk Premia in the Cross Section of Currency Returns," Journal of Finance, American Finance Association, vol. 72(4), pages 1529-1566, August.
    3. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
    4. Rosen Valchev, 2020. "Bond Convenience Yields and Exchange Rate Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 124-166, April.
    5. Jonathan H. Wright, 2011. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset," American Economic Review, American Economic Association, vol. 101(4), pages 1514-1534, June.
    6. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
    7. Ralph W. Tryon, 1979. "Testing for rational expectations in foreign exchange markets," International Finance Discussion Papers 139, Board of Governors of the Federal Reserve System (U.S.).
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