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Nominal Exchange Rate Stationarity and Long-Term Bond Returns

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  • Lustig, Hanno

    (Stanford University)

  • Stathopoulos, Andreas

    (University of WA)

  • Verdelhan, Adrien

    (MIT)

Abstract

We derive a novel test for nominal exchange rate stationarity that exploits the forward-looking information in long maturity bond prices. When nominal exchange rates are stationary, no arbitrage implies that the return on the foreign long bond expressed in dollars is identical to the return on the U.S. bond. In the data, we do not find significant differences in long-term government bond risk premia in dollars across G10 countries, contrary to the large differences in risk premia at short maturities documented in the FX carry trade literature. Moreover, in most of the cases examined, we cannot reject that realized foreign and domestic long-term bond returns in dollars are the same, as if nominal exchange rates were stationary in levels, contrary to the academic consensus.

Suggested Citation

  • Lustig, Hanno & Stathopoulos, Andreas & Verdelhan, Adrien, 2016. "Nominal Exchange Rate Stationarity and Long-Term Bond Returns," Research Papers 3411, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:3411
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    2. Patrick Augustin & Mikhail Chernov & Dongho Song, 2018. "Sovereign Credit Risk and Exchange Rates: Evidence from CDS Quanto Spreads," NBER Working Papers 24506, National Bureau of Economic Research, Inc.
    3. Gao, Feng & Li, Yubin & Wang, Xinjie & Zhong, Zhaodong (Ken), 2021. "Corporate social responsibility and the term structure of CDS spreads," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    4. Oleg Itskhoki & Dmitry Mukhin, 2017. "Exchange Rate Disconnect in General Equilibrium," NBER Working Papers 23401, National Bureau of Economic Research, Inc.
    5. Shimizu, Makoto, 2017. "Effect of net foreign assets on persistency of time-varying risk premium: Evidence from the Dollar-Yen exchange rate," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 255-265.

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