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Country Size, Currency Unions, and International Asset Returns
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Country Size, Currency Unions, and International Asset Returns

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  • Hassan, Tarek

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.

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  • Hassan, Tarek, 2012. "Country Size, Currency Unions, and International Asset Returns," CEPR Discussion Papers 8991, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8991
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    More about this item

    Keywords

    Carry trade; Country size; Currency unions; International return differentials; Market segmentation; Uncovered interest parity;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G0 - Financial Economics - - General

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