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Channels of international risk-sharing: capital gains versus income flows

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  • Thierry Bracke

    ()

  • Martin Schmitz

    ()

Abstract

Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative)when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening. JEL Classification: F21, F30, F36.

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Bibliographic Info

Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 8 (2011)
Issue (Month): 1 (April)
Pages: 45-78

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Handle: RePEc:kap:iecepo:v:8:y:2011:i:1:p:45-78

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Web page: http://www.springerlink.com/link.asp?id=111059

Related research

Keywords: International risk sharing; International portfolio diversification; Consumption smoothing; Cross-border investment; Valuation effects; F21; F30; F36;

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Citations

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Cited by:
  1. Pericoli, Filippo & Pierucci, Eleonora & Ventura, Luigi, 2011. "International investment positions and risk sharing: an empirical analysis on the coordinated portfolio investment survey," MPRA Paper 33071, University Library of Munich, Germany.
  2. Eleonora Pierucci & Luigi Ventura, 2011. "On international risk sharing and financial globalization: some gloomy evidence," Departmental Working Papers of Economics - University 'Roma Tre' 0124, Department of Economics - University Roma Tre.
  3. Maurizio Michael Habib, 2010. "Excess returns on net foreign assets - the exorbitant privilege from a global perspective," Working Paper Series 1158, European Central Bank.
  4. Faruk Balli & Syed Abul Basher & Hatice Ozer Balli, 2013. "International Income Risk-Sharing and the Global Financial Crisis of 2008- 2009," CAMA Working Papers 2013-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Martin Schmitz, 2012. "Financial markets and international risk sharing in emerging market economics," Working Paper Series 1451, European Central Bank.
  6. Nils Holinski & Joan Muysken & Clemens Kool, 2011. "The Impact of International Portfolio Composition on Consumption Risk Sharing," Working Papers 11-20, Utrecht School of Economics.
  7. Holinski, Nils, 2010. "The wealth of nations: global imbalances and adjustments in a financially integrated world," Open Access publications from Maastricht University urn:nbn:nl:ui:27-24477, Maastricht University.

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