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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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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. 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.
  2. Bernardo Guimaraes, 2007. "Optimal external debt and default," 2007 Meeting Papers 104, Society for Economic Dynamics.
  3. Mark J. Kamstra & Robert J. Shiller, 2009. "The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation," Cowles Foundation Discussion Papers 1717, Cowles Foundation for Research in Economics, Yale University.
  4. David Kim & Jeffrey Sheen, 2007. "Consumption Risk-Sharing within Australia and with New Zealand," The Economic Record, The Economic Society of Australia, vol. 83(260), pages 46-59, 03.
  5. Ken Miyajima, 2006. "How to Evaluate Gdp-Linked Warrants," IMF Working Papers 06/85, International Monetary Fund.
  6. Desmet, Klaus & Le Breton, Michel & Ortuño-Ortín, Ignacio & Weber, Shlomo, 2006. "Nation Formation and Genetic Diversity," CEPR Discussion Papers 5918, C.E.P.R. Discussion Papers.
  7. Viral V. Acharya & Alberto Bisin, 2005. "Optimal Financial-Market Integration and Security Design," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2397-2434, November.
  8. Stephane Pallage & Michel A. Robe, 2002. "The States vs. the states: On the Welfare Cost of Business Cycles in the U.S," Cahiers de recherche du Département des sciences économiques, UQAM 20-17, Université du Québec à Montréal, Département des sciences économiques, revised Oct 2002.
  9. Maria Giduskova & Borja Larrain, 2006. "International risk-taking, volatility, and consumption growth," Communities and Banking, Federal Reserve Bank of Boston.
  10. 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.
  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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