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Defining residual risk-sharing opportunities: Pooling world income components

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  • Athanasoulis, Stefano G.
  • Shiller, Robert J.

Abstract

We construct a new method of decomposing the variance of national incomes into components in such a way as to indicate the most important 'residual' risk-sharing opportunities among peoples of the world. The risk-sharing opportunities we study are nonsystematic risk-sharing opportunities. These are the risk-sharing opportunities that remain if systematic risk were already shared, see Athanasoulis and Shiller (2000). The new method developed here uses a simpler approach to deriving the components based on pure variance reduction. With the new method, the income component securities are derived in terms of eigenvectors of a transformed variance matrix of world incomes, but with this method the transformation is to use the residuals when incomes are regressed on world income instead of deviations of incomes from average world income as in Athanasoulis and Shiller (2001). The method is applied using Summers-Heston (1991)data on national incomes for large countries 1950-1990, using two different methods of estimating variances.
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Suggested Citation

  • Athanasoulis, Stefano G. & Shiller, Robert J., 2002. "Defining residual risk-sharing opportunities: Pooling world income components," Research in Economics, Elsevier, vol. 56(1), pages 61-84, June.
    • Handle: RePEc:eee:reecon:v:56:y:2002:i:1:p:61-84
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    References listed on IDEAS

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    1. Athanasoulis, Stefano G & Shiller, Robert J, 2000. "The Significance of the Market Portfolio," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 301-329.
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    5. Athanasoulis, Stefano G. & van Wincoop, Eric, 2000. "Growth uncertainty and risksharing," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 477-505, June.
    6. Shiller, Robert J, 1993. "Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures," Journal of Finance, American Finance Association, vol. 48(3), pages 911-931, July.
    7. van Wincoop, Eric, 1999. "How big are potential welfare gains from international risksharing?," Journal of International Economics, Elsevier, vol. 47(1), pages 109-135, February.
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    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • F00 - International Economics - - General - - - General

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