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Risk Aversion and International Markets: Does Asset Trade Smooth Real Income?

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  • Feeney, JoAnne
  • Jones, Ronald W
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    Abstract

    In a two-country model, complete asset markets do not guarantee that individuals will choose to eliminate all (diversifiable) risk in aggregate consumption. The presence of nontraded goods forces individuals to choose between reducing uncertainty in aggregate consumption and in the composition between traded and nontraded goods. This choice depends on a comparison of the standard coefficient of relative risk aversion with a second type of risk aversion that becomes relevant when nontraded goods are present, one that captures aversion to risk in composition. Regardless of the decision made, asset trade always reduces the risk premium. Copyright 1994 by Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Review of International Economics.

    Volume (Year): 2 (1994)
    Issue (Month): 1 (February)
    Pages: 13-26

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    Handle: RePEc:bla:reviec:v:2:y:1994:i:1:p:13-26

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576

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    Cited by:
    1. Maurice Obstfeld., 1994. "International Capital Mobility in the 1990s," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C94-037, University of California at Berkeley.
    2. Michael R. Pakko, 1996. "International risk sharing and low cross-country consumption correlations: are they really inconsistent?," Working Papers, Federal Reserve Bank of St. Louis 1994-019, Federal Reserve Bank of St. Louis.
    3. Michael Dueker, 1995. "Tariffs and asset market structure: some basic comparative dynamics," Working Papers, Federal Reserve Bank of St. Louis 1995-009, Federal Reserve Bank of St. Louis.
    4. Michael R. Pakko, 1997. "Trade, investment, and international borrowing in two-country business cycle models," Working Papers, Federal Reserve Bank of St. Louis 1997-023, Federal Reserve Bank of St. Louis.

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