Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331899 
Year of Publication: 
2025
Series/Report no.: 
SAFE Working Paper No. 460
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
This paper investigates the long-horizon predictive variance of an international bond strategy where a U.S. investor holds unhedged positions in constant-maturity long-term foreign bonds funded at domestic short-term interest rates. Using over two centuries of data from major economies, the study finds that predictive variance grows with the investment horizon, driven primarily by uncertainties in interest rate differentials and exchange rate returns, which outweigh mean reversion effects. The analysis, incorporating both observable and unobservable predictors, highlights that unobservable predictors linked to shifts in monetary and exchange rate regimes are the dominant source of long-term risk, offering fresh insights into international bond investment strategies.
Subjects: 
Currency risk
Long-term bonds
Predictability
Long-term investments
JEL: 
F31
G12
G15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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