Working Paper: NBER ID: w31418
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: currency risk premiums; exchange rates; bond yields; present-value relationship
JEL Codes: E43; 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 risk premiums (F31) | exchange rate movements (F31) |
| expected depreciation rates (D25) | exchange rate variations (F31) |
| stochastic discount factors (SDFs) (D15) | expected currency depreciation rates (F31) |
| variations in SDFs (C29) | changes in expected currency depreciation rates (F31) |
| bond yields (G12) | expected depreciation rates (D25) |
| pattern of UIP violations (P37) | correlation between expected currency depreciation and interest rate differentials (F31) |