The aim of this paper is to develop an indirect test of international asset markets incompleteness. We show that when a country issues a full set of contingent claims, net foreign assets accumulation and growth rate of output are stationary, mean reverting processes. Examining a panel of 60 developed and developing countries and assessing stationarity with panel unit root tests reveals that net foreign assets accumulation is a non-stationary process whereas growth rate of output is a stationary process regardless of income or region stratum. We then show that this behavior is best accounted by a model of incomplete markets, where agents issue only one-period risk free assets.
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Paper provided by University of Peloponnese, Department of Economics in its series Working Papers with number
00037.