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Country Size, Currency Unions, and International Asset Returns

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  • Tarek Alexander Hassan

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.

Suggested Citation

  • Tarek Alexander Hassan, 2012. "Country Size, Currency Unions, and International Asset Returns," NBER Working Papers 18057, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18057
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    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G0 - Financial Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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