TY  - JOUR
AU  - Hassan,Tarek Alexander
TI  - Country Size, Currency Unions, and International Asset Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18057
PY  - 2012
Y2  - May 2012
DO  - 10.3386/w18057
UR  - http://www.nber.org/papers/w18057
L1  - http://www.nber.org/papers/w18057.pdf
N1  - Author contact info:
Tarek Alexander Hassan
Booth School of Business
University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/834-3291
Fax: 773/753-0851
E-Mail: tarek.hassan@chicagobooth.edu
AB  - 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.
ER  -