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World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

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  • Stefano G. Athanasoulis
  • Robert J. Shiller

Abstract

A method is constructed for decomposing the variance of changes in incomes in the world into components, to indicate the most important risk-sharing opportunities among people of the world. A constant absolute risk premium (CARP) model, an intertemporal general-equilibrium model of the world, is presented to permit optimal contract design. For a contract designer maximizing a social welfare function, the optimal contracts maximize the equilibrium world real interest rate. Securities are defined in terms of eigenvectors of a transformed variance matrix. The method is applied using Penn World Table data on the G-7 countries, 1950-92.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.91.4.1031
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 4 (September)
Pages: 1031-1054

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:4:p:1031-1054

Note: DOI: 10.1257/aer.91.4.1031
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Citations

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Cited by:
  1. Kim, David & Sheen, Jeffrey, 2005. "Consumption Risk-sharing within Australia and with New Zealand," Working Papers 6, University of Sydney, School of Economics.
  2. Bernardo Guimaraes, 2008. "Optimal external debt and default," LSE Research Online Documents on Economics 3604, London School of Economics and Political Science, LSE Library.
  3. DESMET, Klaus & LE BRETON, Michel & ORTUNO-ORTIN, Ignacio & WEBER, Shlomo, 2006. "Nation formation and genetic diversity," CORE Discussion Papers 2006095, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Michel A. Robe & Stephane Pallage, 2003. "The States vs. the states: On the Welfare Cost of Business Cycles in the U.S," Computing in Economics and Finance 2003 43, Society for Computational Economics.
  5. Mark Kamstra & Robert Shiller, 2009. "The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation," Yale School of Management Working Papers amz2418, Yale School of Management.
  6. Stefano Athanasoulis & Robert J. Shiller, 2001. "Defining Residual Risk-Sharing Opportunities: Pooling World Income Components," Yale School of Management Working Papers ysm209, Yale School of Management.
  7. Acharya, Viral V & Bisin, Alberto, 2003. "Optimal Financial Market Integration and Security Design," CEPR Discussion Papers 3852, C.E.P.R. Discussion Papers.
  8. Robert J. Shiller, 2003. "Social Security and Individual Accounts as Elements of Overall Risk-Sharing," American Economic Review, American Economic Association, vol. 93(2), pages 343-347, May.
  9. Maria Giduskova & Borja Larrain, 2006. "International risk-taking, volatility, and consumption growth," Communities and Banking, Federal Reserve Bank of Boston.
  10. Ken Miyajima, 2006. "How to Evaluate Gdp-Linked Warrants," IMF Working Papers 06/85, International Monetary Fund.
  11. Mario Sarcinelli, 2003. "Crisi economiche e mercati finanziari:  di aiuto un nuovo ordine finanziario?," Moneta e Credito, Economia civile, vol. 56(224), pages 387-422.

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