Stochastic discount factor approach to international risk-sharing: evidence from fixed exchange rate episodes
AbstractThis paper presents evidence of the stochastic discount factor approach to international risk-sharing applied to fixed exchange rate regimes. We calculate risk-sharing indices for two episodes of fixed or very rigid exchange rates: the Eurozone before and after the introduction of the Euro, and several emerging economies in the period 1993-2005. This approach suggests almost perfect bilateral risk-sharing among all countries from the Eurozone. Moreover, it implies that emerging markets with fixed/rigid nominal exchange rates against the US dollar in the period achieved almost perfect risk-sharing with the US. We conclude that risk-sharing measures crucially depend on the behavior of the nominal exchange rate, implying almost perfect risk-sharing among countries with fixed/rigid nominal exchange rates. Second, a counterintuitive ranking of the risksharing levels under different nominal exchange rate regimes suggests a limited use of this approach for cross-country risk-sharing comparisons. Real exchange rates might be very smooth, but risk-sharing across countries is not necessarily perfect.
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Bibliographic InfoPaper provided by Utrecht School of Economics in its series Working Papers with number 07-33.
Length: 62 pages
Date of creation: 2008
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-05 (All new papers)
- NEP-BEC-2008-05-05 (Business Economics)
- NEP-CBA-2008-05-05 (Central Banking)
- NEP-IFN-2008-05-05 (International Finance)
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