Country Size, Currency Unions, and International Asset Returns

Tarek Hassan

No 8991, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Carry trade; Country size; Currency unions; International return differentials; Market segmentation; Uncovered interest parity (search for similar items in EconPapers)
JEL-codes: F3 G0 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (6)

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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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