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World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

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  • Stefano G. Athanasoulis
  • Robert J. Shiller

Abstract

A method is constructed for decomposing the variance of changes in incomes in the world into components, to indicate the most important risk-sharing opportunities among people of the world. A constant absolute risk premium (CARP) model, an intertemporal general-equilibrium model of the world, is presented to permit optimal contract design. For a contract designer maximizing a social welfare function, the optimal contracts maximize the equilibrium world real interest rate. Securities are defined in terms of eigenvectors of a transformed variance matrix. The method is applied using Penn World Table data on the G-7 countries, 1950-92.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.91.4.1031
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 4 (September)
Pages: 1031-1054

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:4:p:1031-1054
Note: DOI: 10.1257/aer.91.4.1031
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Find related papers by JEL classification:
  • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Cited by:

  1. Robert J. Shiller, 2003. "Social Security and Individual Accounts as Elements of Overall Risk-Sharing," American Economic Review, American Economic Association, vol. 93(2), pages 343-347, May.
  2. David Kim & Jeffrey Sheen, 2007. "Consumption Risk-Sharing within Australia and with New Zealand," The Economic Record, The Economic Society of Australia, vol. 83(260), pages 46-59, 03.
  3. Bernardo Guimaraes, 2007. "Optimal external debt and default," 2007 Meeting Papers 104, Society for Economic Dynamics.
  4. Michel A. Robe & Stephane Pallage, 2004. "The States vs. the states: On the Welfare Cost of Business Cycles in the U.S," Econometric Society 2004 North American Winter Meetings 164, Econometric Society.
  5. Athanasoulis, Stefano G. & Shiller, Robert J., 2002. "Defining residual risk-sharing opportunities: Pooling world income components," Research in Economics, Elsevier, vol. 56(1), pages 61-84, June.
  6. DESMET, Klaus & LE BRETON, Michel & ORTUNO-ORTIN, Ignacio & WEBER, Shlomo, 2006. "Nation formation and genetic diversity," CORE Discussion Papers 2006095, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Mario Sarcinelli, 2003. "Crisi economiche e mercati finanziari:  di aiuto un nuovo ordine finanziario?," Moneta e Credito, Economia civile, vol. 56(224), pages 387-422.
  8. Viral V. Acharya & Alberto Bisin, 2005. "Optimal Financial-Market Integration and Security Design," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2397-2434, November.
  9. Ken Miyajima, 2006. "How to Evaluate Gdp-Linked Warrants; Price and Repayment Capacity," IMF Working Papers 06/85, International Monetary Fund.
  10. Maria Giduskova & Borja Larrain, 2006. "International risk-taking, volatility, and consumption growth," Communities and Banking, Federal Reserve Bank of Boston.
  11. Mark J. Kamstra & Robert J. Shiller, 2009. "The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation," Cowles Foundation Discussion Papers 1717, Cowles Foundation for Research in Economics, Yale University.

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