The efficiency of risk sharing between UK and US: Robust estimation and calibration under market incompleteness

We propose a novel estimator for the amount of international risk sharing that depends exclusively on asset returns data. In particular, our estimator has a nonparametric flavor in that it makes no parametric assumption on preferences and on the stochastic process that governs the dynamics of asset returns. This is in contrast with the existing estimators in the literature that either assume a specific utility function or that asset returns follow a geometric Brownian motion (GBM). Our estimates reveal there is less risk sharing between UK and US than one would find under the GBM assumption, though much more than what consumption data might suggest. Moreover, a simple calibration analysis shows that market incompleteness alone is enough to explain the difference between the consumption-based estimate of the risk-sharing index and ours.