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Capital market integration and consumption risk sharing over the long run

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  • Rangvid, Jesper
  • Santa-Clara, Pedro
  • Schmeling, Maik

Abstract

We empirically investigate time variation in capital market integration and consumption risk sharing using data for 16 countries from 1875 to 2012. We show that there has been considerable variation over time in the degrees of capital market integration and consumption risk sharing and that higher capital market integration forecasts more consumption risk sharing in the future. This finding is robust to controlling for trade openness and exchange rate volatility as alternative drivers of risk sharing. Finally, we calculate the welfare costs of imperfect consumption risk sharing and find that these costs vary over time, line up with variation in risk sharing, and are quite substantial during periods of low risk sharing.

Suggested Citation

  • Rangvid, Jesper & Santa-Clara, Pedro & Schmeling, Maik, 2016. "Capital market integration and consumption risk sharing over the long run," Journal of International Economics, Elsevier, vol. 103(C), pages 27-43.
    • Handle: RePEc:eee:inecon:v:103:y:2016:i:c:p:27-43
    DOI: 10.1016/j.jinteco.2016.08.001
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    5. Asdrubali, Pierfederico & Kim, Soyoung & Pericoli, Filippo Maria & Poncela, Pilar, 2023. "Risk sharing channels in OECD countries: A heterogeneous panel VAR approach," Journal of International Money and Finance, Elsevier, vol. 131(C).
    6. Manuel Ramos-Francia & Santiago García-Verdú, 2018. "Globalisation and consumption risk-sharing in emerging market economies," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and deglobalisation, volume 100, pages 231-244, Bank for International Settlements.
    7. Francesco Caselli & Miklós Koren & Milan Lisicky & Silvana Tenreyro, 2020. "Diversification Through Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 449-502.
    8. John Cotter & Stuart Gabriel & Richard Roll, 2016. "Nowhere to run, nowhere to hide: asset diversification in a flat world," Working Papers 201612, Geary Institute, University College Dublin.
    9. Bekaert, Geert & Mehl, Arnaud, 2019. "On the global financial market integration “swoosh” and the trilemma," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 227-245.
    10. Parsley, David & Popper, Helen, 2019. "GDP Synchronicity and Risk Sharing Channels in a Monetary Union: Blue State and Red States," MPRA Paper 98981, University Library of Munich, Germany.
    11. Cimadomo, Jacopo & Ciminelli, Gabriele & Furtuna, Oana & Giuliodori, Massimo, 2020. "Private and public risk sharing in the euro area," European Economic Review, Elsevier, vol. 121(C).
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    13. Gerdie Everaert & Lorenzo Pozzi, 2022. "Encompassing measures of international consumption risk sharing and their link with trade and financial globalization," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(2), pages 433-449, March.
    14. Islamaj, Ergys & Kose, M. Ayhan, 2022. "What types of capital flows help improve international risk sharing?," Journal of International Money and Finance, Elsevier, vol. 122(C).
    15. Aidi Tang, 2023. "Financial Integration and International Dynamics: The Role of Volatility Shocks," Mathematics, MDPI, vol. 11(23), pages 1-27, November.
    16. Lake, Alfred & Maurin, Laurent & Minnella, Enrico, 2022. "Estimating financial integration in Europe: How to separate structural trends from cyclical fluctuations," EIB Working Papers 2022/15, European Investment Bank (EIB).
    17. Oosterlinck, Kim & Accominotti, Olivier & BRIERE, Marie & Burietz, Aurore & Szafarz, Ariane, 2020. "Did Globalization Kill Contagion?," CEPR Discussion Papers 14395, C.E.P.R. Discussion Papers.
    18. Uribe, Jorge M. & Mosquera-López, Stephania & Arenas, Oscar J., 2022. "Assessing the relationship between electricity and natural gas prices in European markets in times of distress," Energy Policy, Elsevier, vol. 166(C).
    19. Asdrubali, Pierfederico & Kim, Soyoung & Pericoli, Filippo & Poncela, Pilar, 2018. "New Risk Sharing Channels in OECD Countries: a Heterogeneous Panel VAR," Working Papers 2018-13, Joint Research Centre, European Commission.
    20. Qiu, Yue & Ren, Yu & Xie, Tian, 2022. "Global factors and stock market integration," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 526-551.
    21. David Parsley & Helen Popper, 2021. "Risk Sharing in a Politically Divided Monetary Union," Open Economies Review, Springer, vol. 32(4), pages 649-669, September.
    22. Cimadomo, Jacopo & Giuliodori, Massimo & Lengyel, Andras & Mumtaz, Haroon, 2023. "Changing patterns of risk-sharing channels in the United States and the euro area," Working Paper Series 2849, European Central Bank.
    23. Cakici, Nusret & Zaremba, Adam, 2023. "Misery on Main Street, victory on Wall Street: Economic discomfort and the cross-section of global stock returns," Journal of Banking & Finance, Elsevier, vol. 149(C).

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    More about this item

    Keywords

    Market integration; Consumption risk sharing; Long-run international data;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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