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Country Size, Currency Unions, and International Asset Returns

Tarek A. Hassan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

December 22, 2012

Journal of Finance, Forthcoming
AFA 2011 Denver Meetings Paper

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.

Number of Pages in PDF File: 73

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

JEL Classification: F3, G0

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Date posted: November 26, 2008 ; Last revised: January 11, 2013

Suggested Citation

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

Contact Information

Tarek Alexander Hassan (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://faculty.chicagobooth.edu/tarek.hassan/index.html
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Feedback to SSRN

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