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Literature review demonstrates present-value links between bond and currency risk premiums across investment horizons, highlighting critical challenges for existing asset pricing models.
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.
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Chernov et al. (2023) studied this question.
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