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Currency Risk Premiums: A Multi-Horizon Perspective
Working paper   Open access

Currency Risk Premiums: A Multi-Horizon Perspective

Mikhail Chernov and Magnus Dahlquist
2023

Abstract

Bond return bond risk premium currency excess return currency risk premium expectations hypothesis foreign exchange rate forward exchange rate monetary policy nominal exchange rate present-value approach real exchange rate spot exchange rate stochastic discount factor uncovered interest E43 E52 F31 G12 G15
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.
url
http://dx.doi.org/10.2139/ssrn.4490971View
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