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World Income Components: Measuring and Exploting International Risk Sharing Opportunities

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  • Athanasoulis, S.
  • Shiller, R.J.

Abstract

We provide methods of decomposing the variance of world national incomes into components in such a way as to indicate the most important risk-sharing opportunities, and, therefore, the most important missing international risk markets to establish. One method uses a total variance reduction criterion, and identifies risk-sharing opportunities in terms of eigenvectors of a variance matrix of residuals produced when country incomes are regressed on world income. Another method uses a mean-variance utility-maximizing criterion and identifies risk-sharing opportunities in terms of eigenvectors of a variance matrix of deviations of country incomes from their respective contract-year shares of world income. The two methods are applied using Summers-Heston (1991) data on national incomes for large countries 1950-1990, each using two different methods of estimating variances. While these data are not sufficient to provide accurate estimates of the requisite variance matrices of (transformed) national incomes, the results are suggestive of important new markets that could actually be created, and show that there may be large welfare gains to creating some of these markets.

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Bibliographic Info

Paper provided by Yale - Economic Growth Center in its series Papers with number 725.

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Length: 69 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:fth:yalegr:725

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Web page: http://www.econ.yale.edu/~egcenter/
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Keywords: RISK; MANAGEMENT; INCOME;

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  13. repec:fth:calaec:16-92 is not listed on IDEAS
  14. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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