Finance Seminar med Tarek Hassan, Booth School of Business, University of Chicago

Upcoming Finance Seminar with Tarek Hassan, Booth School of Business, University of Chicago

Tarek Hassan will be presenting: Forward and Spot Exchange Rates in a Multi-Currency World

Relevant reading: Country Size, Currency Unions, and International Asset Returns

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.