Country Size, Currency Unions, and International Asset Returns

73 Pages Posted: 26 Nov 2008 Last revised: 11 Jan 2013

See all articles by Tarek A. Hassan

Tarek A. Hassan

Boston University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 22, 2012

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: International return differentials, country size, currency unions, uncovered interest parity, market segmentation

JEL Classification: F3, G0

Suggested Citation

Hassan, Tarek Alexander, Country Size, Currency Unions, and International Asset Returns (December 22, 2012). Journal of Finance, Forthcoming, AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1307287 or http://dx.doi.org/10.2139/ssrn.1307287

Tarek Alexander Hassan (Contact Author)

Boston University ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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