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Country Size, Currency Unions, and International Asset Returns

  • TAREK A. HASSAN

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.

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File URL: http://hdl.handle.net/10.1111/jofi.2013.68.issue-6
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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 68 (2013)
Issue (Month): 6 (December)
Pages: 2269-2308

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Handle: RePEc:bla:jfinan:v:68:y:2013:i:6:p:2269-2308
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