Quantum mechanics

Volatility (finance)

Predictability

Carry (investment)

Arbitrage

Developmental psychology

Economics

Risk premium

Physics

Psychology

Monetary economics

Yield curve

Foreign exchange risk

Maturity (psychological)

Financial economics

Bond

Finance

Currency

American Economic Review

Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases. Across developed countries, the local currency term premia, which increase with the maturity of the bonds, offset the currency risk premia. Similarly, in the time-series, the predictability of foreign bond returns in dollars declines with the bonds’ maturities. Leading no-arbitrage models in international finance do not match the downward term structure of currency carry trade risk premia. We derive a simple preference-free condition that no-arbitrage models need to reproduce in the absence of carry trade risk premia on long-term bonds. (JEL E43, G12, G15)

The Term Structure of Currency Carry Trade Risk Premia