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World Income Components: Measuring and Exploiting International Risk Sharing Opportunities

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Author Info
Robert J. Shiller
Stefano Athanasoulis

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5095.

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Date of creation: Apr 1995
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Handle: RePEc:nbr:nberwo:5095

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G1 - Financial Economics - - General Financial Markets

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. Stefano G. Athanasoulis & Robert J. Shiller, 1997. "The Significance of the Market Portfolio," Cowles Foundation Discussion Papers 1154, Cowles Foundation, Yale University. [Downloadable!]
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  2. Obstfeld, Maurice, 1992. "International risk sharing and capital mobility: another look," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 115-121, February. [Downloadable!] (restricted)
  3. Robert J. Shiller, 1993. "Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures indices and Perpetual Futures," NBER Technical Working Papers 0131, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Maurice Obstfeld, 1994. "Are Industrial-Country Consumption Risks Globally Diversified?," NBER Working Papers 4308, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Sachs, Jeffrey & Sala-i-Martin, Xavier, 1992. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States," CEPR Discussion Papers 632, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Geanakoplos, John, 1990. "An introduction to general equilibrium with incomplete asset markets," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 1-38. [Downloadable!] (restricted)
  7. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  8. Tesar, L.L. & Werner, I.M., 1992. "Home Bias and the Globalization of Securities Markets," University of California at Santa Barbara, Economics Working Paper Series 16-92, Department of Economics, UC Santa Barbara.
  9. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Working Papers 4719, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August. [Downloadable!] (restricted)
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  11. Thomas J. Sargent & Christopher A. Sims, 1977. "Business cycle modeling without pretending to have too much a priori economic theory," Working Papers 55, Federal Reserve Bank of Minneapolis. [Downloadable!]
  12. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February. [Downloadable!] (restricted)
  13. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August. [Downloadable!] (restricted)
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  14. Maurice Obstfeld, 1995. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. D Quah & T Sargent, 1993. "A Dynamic Index Model for Large Cross Sections," CEP Discussion Papers 0132, Centre for Economic Performance, LSE.
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  16. 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 911-31, July. [Downloadable!] (restricted)
  17. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October. [Downloadable!] (restricted)
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Cited by:
(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. Robert J. Shiller, 1997. "Expanding the Scope of Individual Risk Management: Moral Hazard and Other Behavioral Considerations," Cowles Foundation Discussion Papers 1145, Cowles Foundation, Yale University. [Downloadable!]
  2. Wagner, W., 2000. "Decentralized international risk sharing and governmental moral hazard," Discussion Paper 92, Tilburg University, Center for Economic Research. [Downloadable!]
  3. Auffret, Philippe, 2001. "An alternative unifying measure of welfare gains from risk-sharing," Policy Research Working Paper Series 2676, The World Bank. [Downloadable!]
  4. Stefano Athanasoulis & Eric van Wincoop, 1997. "Growth uncertainty and risksharing," Staff Reports 30, Federal Reserve Bank of New York. [Downloadable!]
  5. Stefano G. Athanasoulis & Robert J. Shiller, 2001. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities," American Economic Review, American Economic Association, vol. 91(4), pages 1031-1054, September. [Downloadable!] (restricted)
    Other versions:
  6. Stefano Athanasoulis & Robert Shiller & Eric van Wincoop, 1999. "Macro markets and financial security," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 21-39. [Downloadable!]
  7. Stafano Athanasoulis & Eric van Wincoop, 1998. "Risksharing within the United States: what have financial markets and fiscal federalism accomplished?," Research Paper 9808, Federal Reserve Bank of New York. [Downloadable!]
  8. Robert J. Shiller & Ryan Schneider, 1995. "Labor Income Indices Designed for Use in Contracts Promoting Income Risk Management," Cowles Foundation Discussion Papers 1110, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  9. Stefano ATHANASOULIS & Eric VAN WINCOOP, 1997. "Growth Uncertainty And Risksharing," Economic Report 41, Iowa State University Department of Economics. [Downloadable!]
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