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International risk sharing with endogenously segmented asset markets

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  • Cociuba, Simona E.
  • Ramanarayanan, Ananth

Abstract

Asset price data imply a large degree of international risk sharing, while aggregate consumption data do not. We show that a model with trade in goods and endogenously segmented asset markets can account for this puzzling discrepancy. Active households—who pay a fixed cost to transfer money into or out of assets—share risk within and across countries, and their marginal utility growth prices assets, so asset prices imply high risk sharing. Inactive households consume their current income and do not share risk, so aggregate consumption (which averages across all households) reflects lower risk sharing. The model also provides a resolution to the Backus-Smith-Kollmann puzzle.

Suggested Citation

  • Cociuba, Simona E. & Ramanarayanan, Ananth, 2019. "International risk sharing with endogenously segmented asset markets," Journal of International Economics, Elsevier, vol. 117(C), pages 61-78.
  • Handle: RePEc:eee:inecon:v:117:y:2019:i:c:p:61-78
    DOI: 10.1016/j.jinteco.2018.12.003
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    Cited by:

    1. Robert Kollmann, 2012. "Limited asset market participation and the consumption‐real exchange rate anomaly," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(2), pages 566-584, May.

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    More about this item

    Keywords

    International risk sharing; Real exchange rates; Segmented asset markets; Limited asset market participation; Consumption-real exchange rate anomaly; Backus-Smith-Kollmann puzzle;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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