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How big are potential welfare gains from international risksharing?

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  • van Wincoop, Eric

Abstract

There is extensive evidence that the degree of risksharing accomplished by international financial markets is low. Some have argued that this is the result of small potential benefits from risksharing. The gains from riskpooling that have been reported in the literature range from negligible to enormous. This paper documents to what extent the results are sensitive to the parameterization of preferences, and assumptions about the stochastic process and measurement of the endowment. We find that for realistic assumptions about the underlying factors, the potential gains from risksharing are quite sizable. For OECD countries they are equivalent to increases in tradables consumption in the range of 1.1 to 3.5% for a 50 year horizon, and 2.5 to 7.4% for a 100 year horizon

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 47 (1999)
Issue (Month): 1 (February)
Pages: 109-135

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Handle: RePEc:eee:inecon:v:47:y:1999:i:1:p:109-135

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  17. Paolo Pesenti & Eric van Wincoop, 1996. "Do Nontraded Goods Explain the Home Bias Puzzle?," NBER Working Papers 5784, National Bureau of Economic Research, Inc.
  18. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, American Economic Association, vol. 65(5), pages 900-922, December.
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  21. Wincoop, Eric van, 1994. "Welfare gains from international risksharing," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(2), pages 175-200, October.
  22. van Wincoop, Eric, 1996. " A Multi-country Real Business Cycle Model with Heterogeneous Agents," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(2), pages 233-51, June.
  23. Karen K. Lewis, 1996. "Consumption, Stock Returns, and the Gains from International Risk-Sharing," NBER Working Papers 5410, National Bureau of Economic Research, Inc.
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