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International Diversification of Social and Private Risk: The US and Japan

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  • Stephen S. Golub

    (Swarthmore College)

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    Abstract

    This paper concerns the gains from international trade in risky assets, with an application to the United States and Japan. I examine the role of international financial markets in diversifying the risks associated with the aggregate consumption opportunities of a nation (social risk) and the risks related to individual agents' consumption opportunities (private risk). The main empirical result is that international portfolio diversification between the United States and Japan leads to small reductions in social risk but large reductions in some private risks, especially for corporate profits.

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    File URL: http://cowles.econ.yale.edu/P/cd/d09b/d0955.pdf
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    Bibliographic Info

    Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 955.

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    Length: 33 pages
    Date of creation: Aug 1990
    Date of revision:
    Handle: RePEc:cwl:cwldpp:955

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    1. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October.
    2. Meese, Richard, 1990. "Currency Fluctuations in the Post-Bretton Woods Era," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 117-34, Winter.
    3. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
    4. James Tobin, 1984. "A Mean-Variance Approach to Fundamental Valuations," Cowles Foundation Discussion Papers 711R, Cowles Foundation for Research in Economics, Yale University.
    5. James Tobin & William C. Brainard, 1976. "Asset Markets and the Cost of Capital," Cowles Foundation Discussion Papers 427, Cowles Foundation for Research in Economics, Yale University.
    6. Maurice Obstfeld, 1985. "Capital Mobility in the World Economy: Theory and Measurement," NBER Working Papers 1692, National Bureau of Economic Research, Inc.
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    8. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    9. Golub, Stephen S., 1990. "International capital mobility: net versus gross stocks and flows," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 424-439, December.
    10. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-75, September.
    11. Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," UCLA Economics Working Papers 538, UCLA Department of Economics.
    12. Harold L. Cole & Maurice Obstfeld, 1989. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
    13. Christopher A. Sims, 1988. "Bayesian skepticism on unit root econometrics," Discussion Paper / Institute for Empirical Macroeconomics 3, Federal Reserve Bank of Minneapolis.
    14. Wheatley, Simon, 1988. "Some tests of international equity integration," Journal of Financial Economics, Elsevier, vol. 21(2), pages 177-212, September.
    15. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    16. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    17. Goldsmith, Raymond W., 1985. "Comparative National Balance Sheets," University of Chicago Press Economics Books, University of Chicago Press, edition 0, number 9780226301532, August.
    18. Brainard, William & Dolbear, F T, 1971. "Social Risk and Financial Markets," American Economic Review, American Economic Association, vol. 61(2), pages 360-70, May.
    19. Cole, Harold, 1988. "Financial Structure and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 237-59, May.
    20. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    21. Stock, James H & Watson, Mark W, 1988. "Variable Trends in Economic Time Series," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 147-74, Summer.
    22. Phillips, P C B, 1991. "To Criticize the Critics: An Objective Bayesian Analysis of Stochastic Trends," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(4), pages 333-64, Oct.-Dec..
    23. Frankel, Jeffrey A., 1988. "Factors Determining the Flow of Capital from Japan to the United States," Department of Economics, Working Paper Series qt1qb3j85t, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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