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The Term Structure of Currency Carry Trade Risk Premia

Listed author(s):
  • Hanno Lustig
  • Andreas Stathopoulos
  • Adrien Verdelhan

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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File URL: http://www.nber.org/papers/w19623.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19623.

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Date of creation: Nov 2013
Handle: RePEc:nbr:nberwo:19623
Note: AP EFG IFM
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