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Banks, Financial Markets and International Consumption Risk Sharing

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  • Markus Leibrecht

    ()
    (Department of Economics, Vienna University of Economics & B.A.)

  • Johann Scharler

    ()
    (Department of Economics, University of Linz)

Abstract

In this paper we empirically explore how characteristics of the domestic financial system influence the international allocation of consumption risk using a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Specifically, we find that countries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the international diversification of consumption risk. We also find that countries with market-based financial systems manage to share a significantly larger fraction of their country-specific risk than bank-based economies.

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Paper provided by Vienna University of Economics, Department of Economics in its series Department of Economics Working Papers with number wuwp128.

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Date of creation: May 2009
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Handle: RePEc:wiw:wiwwuw:wuwp128

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  1. Mathias Hoffmann & Thomas Nitschka, 2008. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," IEW - Working Papers 376, Institute for Empirical Research in Economics - University of Zurich.
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  6. Alicia García-Herrero & Francisco F. Vázquez, 2007. "International Diversification Gains and Home Bias in Banking," IMF Working Papers 07/281, International Monetary Fund.
  7. Mathias Hoffmann & Iryna Shcherbakova-Stewen, 2011. "Consumption Risk Sharing over the Business Cycle: The Role of Small Firms' Access to Credit Markets," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1403-1416, November.
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  12. Artis, Michael J & Hoffmann, Mathias, 2004. "Financial Globalization, International Business Cycles and Consumption Risk Sharing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4697, C.E.P.R. Discussion Papers.
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  15. Maurice Obstfeld., 1993. "Are Industrial-Country Consumption Risks Globally Diversified?," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C93-014, University of California at Berkeley.
  16. Sorensen, Bent E. & Wu, Yi-Tsung & Yosha, Oved & Zhu, Yu, 2007. "Home bias and international risk sharing: Twin puzzles separated at birth," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(4), pages 587-605, June.
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  19. Artis, Michael J & Hoffmann, Mathias, 2007. "Declining Home Bias and the Increase in International Risk Sharing: Lessons from European Integration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6617, C.E.P.R. Discussion Papers.
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Cited by:
  1. Nitschka, Thomas, 2011. "Banking sectors' international interconnectedness: Implications for consumption risk sharing in Europe," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48684, Verein für Socialpolitik / German Economic Association.
  2. Bos Jaap W.B. & Economidou Claire & Zhang Lu, 2011. "Specialization in the Presence of Trade and Financial Integration: Explorations of the Integration-Specialization Nexus," Research Memorandum 026, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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