Working Paper: CEPR ID: DP18265
Authors: 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.
Keywords: bond risk premium; currency risk premium; monetary policy; nominal exchange rate; real exchange rate
JEL Codes: E52; F31; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| currency depreciation rates (F31) | cross-country differences in sovereign bond yields (G15) |
| currency depreciation rates (F31) | currency risk premiums (F31) |
| cross-country differences in sovereign bond yields (G15) | currency risk premiums (F31) |
| currency risk premiums (F31) | expected long-run exchange rate (F31) |
| expected future cash flows (G17) | currency depreciation rate (F31) |
| discount rates (E43) | currency depreciation rate (F31) |
| currency risk premiums (F31) | expected future cash flows (G17) |
| currency risk premiums (F31) | interest rate differentials (E43) |