Country Size, Currency Unions, and International Asset Returns

Tarek Alexander Hassan

No 18057, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Differences in real interest rates across developed economies are puzzlingly large and persistent. I propose a simple explanation: Bonds issued in the currencies of larger economies are expensive because they insure against shocks that affect a larger fraction of the world economy. I show that differences in the size of economies indeed explain a large fraction of the cross-sectional variation in currency returns. The data also support a number of additional implications of the model: The introduction of a currency union lowers interest rates in participating countries and stocks in the non-traded sector of larger economies pay lower expected returns.

JEL-codes: F3 F31 F4 G0 G12 G15 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-mon and nep-opm
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Published as Tarek A. Hassan, 2013. "Country Size, Currency Unions, and International Asset Returns," Journal of Finance, American Finance Association, vol. 68(6), pages 2269-2308, December.

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Related works:
Journal Article: Country Size, Currency Unions, and International Asset Returns (2013)
Working Paper: Country Size, Currency Unions, and International Asset Returns (2012)
Working Paper: Country Size, Currency Unions, and International Asset Returns (2009)
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