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Country Size, Currency Unions, and International Asset Returns

  • Tarek Alexander 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18057.

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Date of creation: May 2012
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Publication status: published as Tarek A. Hassan, 2013. "Country Size, Currency Unions, and International Asset Returns," Journal of Finance, American Finance Association, vol. 68(6), pages 2269-2308, December.
Handle: RePEc:nbr:nberwo:18057
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