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Conditional Market Comovements, Welfare, and Contagions: The Role of Time-Varying Risk Aversion

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  • Timothy K. Chue

    (Hong Kong University of Science and Technology)

Abstract

Time-varying investor risk aversion can generate significant state dependence in the correlation of international stock returns, despite the underlying endowment/dividend processes being independent and identically distributed. The welfare benefits of international diversification associated with these time-varying comovements tend to increase (rather than decrease) when the correlations of international stock returns are high or cross-market "contagions" appear most severe. In a world where risk sharing among different countries is still imperfect, our findings imply that contagionlike variations in the correlation of international stock returns can arise if the benefits of international risk sharing are to be fully exploited.

Suggested Citation

  • Timothy K. Chue, 2005. "Conditional Market Comovements, Welfare, and Contagions: The Role of Time-Varying Risk Aversion," The Journal of Business, University of Chicago Press, vol. 78(3), pages 949-968, May.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:3:p:949-968
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    File URL: http://dx.doi.org/10.1086/429649
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    Cited by:

    1. Auer, Benjamin R., 2013. "Can habit formation under complete market integration explain the cross-section of international equity risk premia?," Review of Financial Economics, Elsevier, vol. 22(2), pages 61-67.
    2. Ülkü, Numan & Baker, Saleh, 2014. "Country world betas: The link between the stock market beta and macroeconomic beta," Finance Research Letters, Elsevier, vol. 11(1), pages 36-46.

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