Abstract

http://ssrn.com/abstract=1307287
 
 

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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

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.

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
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