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The Home Bias and Capital Income Flows between Countries and Regions

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  • Michael J. Artis
  • Mathias Hoffmann

Abstract

This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other's output (Shiller securities). Our framework allows us to distinguish between two channels of risk sharing: ex ante diversification that leads to income smoothing through capital income flows and ex-post consumption smoothing through savings and dissavings. The model successfully replicates the patterns of income and consumption smoothing observed in both U.S. state-level and international data. The increase in international consumption risk sharing is closely associated with the decline in international portfolio home bias. While capital income flows remain relatively limited as a channel of risk sharing at business cycle frequencies, we find that better international portfolio diversification has led to a considerable increase in capital income flows at medium and long horizons.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 316.

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Date of creation: Mar 2007
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Handle: RePEc:zur:iewwpx:316

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Keywords: Consumption Risk Sharing; International and regional business cycles; Capital flows; Home Bias; Non-stationary panel data;

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Cited by:
  1. Aidan Corcoran, 2008. "International Financial Integration and Consumption Risk Sharing," The Institute for International Integration Studies Discussion Paper Series iiisdp241, IIIS.
  2. Peter Fuleky & L Ventura & Qianxue Zhao, 2013. "Common correlated effects and international risk sharing," Working Papers 201304, University of Hawaii at Manoa, Department of Economics.
  3. Eleonora Pierucci & Luigi Ventura, 2011. "On international risk sharing and financial globalization: some gloomy evidence," Departmental Working Papers of Economics - University 'Roma Tre' 0124, Department of Economics - University Roma Tre.
  4. 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.
  5. Artis, Michael J & Okubo, Toshihiro, 2008. "The Intranational Business Cycle: Evidence from Japan," CEPR Discussion Papers 6686, C.E.P.R. Discussion Papers.
  6. Bracke, Thierry & Schmitz, Martin, 2008. "Channels of international risk-sharing: capital gains versus income flows," Working Paper Series 0938, European Central Bank.
  7. von Furstenberg, George M., 2004. "Consumption Smoothing Across States and Time: International Insurance vs. Foreign Loans," Discussion Paper Series 1: Economic Studies 2004,13, Deutsche Bundesbank, Research Centre.
  8. Pierucci, Eleonora & Ventura, Luigi, 2012. "International risk sharing and globalization," MPRA Paper 35869, University Library of Munich, Germany.
  9. Agustin Benetrix, 2010. "International Risk Sharing and the Irish Economy," The Institute for International Integration Studies Discussion Paper Series iiisdp343, IIIS.
  10. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2006. "Home bias in global bond and equity markets: the role of real exchange rate volatility," Working Paper Series 0685, European Central Bank.
  11. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, vol. 89(2), pages 258-270, July.
  12. Stefan Gerlach & Mathias Hoffmann, 2008. "The Impact of the Euro on International Stability and Volatility," European Economy - Economic Papers 309, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  13. repec:hae:wpaper:2013-3 is not listed on IDEAS
  14. Thomas Nitschka, 2008. "The Risk Premium on the Euro Area Market Portfolio: The Role of Real Estate," IEW - Working Papers 385, Institute for Empirical Research in Economics - University of Zurich.
  15. Eleonora Pierucci & Luigi Ventura, 2010. "Risk Sharing: A Long Run Issue?," Open Economies Review, Springer, vol. 21(5), pages 705-730, November.

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