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The Spirit of Capitalism and International Risk Sharing

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Author Info
Timothy K. Chue
Abstract

We show that a model of the spirit of capitalism can generate a high degree of international risk sharing as measured by the discount-factor-based approach of Brandt, Cochrane, and Santa-Clara (2001), even when consumption and portfolio holdings exhibit "home bias". We also show how portfolio externalities can arise in the model, and highlight the caution that one needs in interpreting discount-factor-based measures of international risk sharing: in the presence of portfolio externalities, even when the measured degree of risk sharing is perfect, it is still possible for government policies to induce investors to hold better-diversified portfolios and attain higher welfare

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 589.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:589

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Related research
Keywords: The spirit of capitalism; International risk sharing; Discount factor; Portfolio externality.;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(3), pages 659-80.
  2. Raman Uppal & Tan Wang, 2003. "Model Misspecification and Underdiversification," Journal of Finance, American Finance Association, vol. 58(6), pages 2465-2486, December. [Downloadable!] (restricted)
  3. Esther Duflo & Emmanuel Saez, 2000. "Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues' Choices," NBER Working Papers 7735, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June. [Downloadable!] (restricted)
  5. Bakshi, Gurdip S & Chen, Zhiwu, 1996. "The Spirit of Capitalism and Stock-Market Prices," American Economic Review, American Economic Association, vol. 86(1), pages 133-57, March. [Downloadable!] (restricted)
  6. Michael W. Brandt & John H. Cochrane & Pedro Santa-Clara, 2001. "International Risk Sharing is Better Than You Think (or Exchange Rates are Much Too Smooth)," NBER Working Papers 8404, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Michael J. Brennan. and H. Henry Cao., 1997. "International Portfolio Investment Flows," Research Program in Finance Working Papers RPF-271, University of California at Berkeley. [Downloadable!]
  8. Grossman, Sanford J. & Shiller, Robert J., 1982. "Consumption correlatedness and risk measurement in economies with non-traded assets and heterogeneous information," Journal of Financial Economics, Elsevier, vol. 10(2), pages 195-210, July. [Downloadable!] (restricted)
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  12. Uppal, Raman, 1993. " A General Equilibrium Model of International Portfolio Choice," Journal of Finance, American Finance Association, vol. 48(2), pages 529-53, June. [Downloadable!] (restricted)
  13. Brennan, Michael J & Cao, H Henry, 1997. " International Portfolio Investment Flows," Journal of Finance, American Finance Association, vol. 52(5), pages 1851-80, December. [Downloadable!] (restricted)
  14. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December. [Downloadable!] (restricted)
  15. Smith, William T, 2001. "How Does the Spirit of Capitalism Affect Stock Market Prices?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(4), pages 1215-32.
  16. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(1), pages 45-60. [Downloadable!] (restricted)
  17. Sanford J. Grossman & Robert J. Shiller, 1982. "Consumption Correlatedness and Risk Measurement in Economies with Non trade Assets and Heterogeneous Information," NBER Working Papers 0690, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eric R. Young, 2004. "The Wealth Distribution and the Demand for Status," Macroeconomics 0410008, EconWPA. [Downloadable!]
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