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The Home Bias and Capital Income Flows between Countries and Regions

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  • Artis, Michael J
  • Hoffmann, Mathias

Abstract

This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other’s output (Shiller securities). This model allows us to identify the channels through which improvements in international risk sharing have come about. The model predicts crosscountry and cross-regional income flows with considerable precision. Both international income flows as well as consumption risk sharing have increased since 1990, in line with the gradual removal of country portfolio home bias documented elsewhere. Still, the increase in international income flows falls short of explaining all of the consumption risk sharing we see in international data. We show that heterogeneity in countries’ gross foreign asset positions is important in explaining this result. While countries with less portfolio home bias enjoy better consumption risk sharing, our findings also suggest that heterogeneity in country portfolios opens a separate channel for consumption risk sharing, possibly through asymmetric valuation effects that have been emphasized in the recent literature.

Suggested Citation

  • Artis, Michael J & Hoffmann, Mathias, 2006. "The Home Bias and Capital Income Flows between Countries and Regions," CEPR Discussion Papers 5691, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5691
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Artis & Toshihiro Okubo, 2008. "The Intranational Business Cycle: Evidence from Japan," Centre for Growth and Business Cycle Research Discussion Paper Series 101, Economics, The Univeristy of Manchester.
    2. repec:mtp:titles:0262037165 is not listed on IDEAS
    3. Mathias Hoffmann & Thomas Nitschka, 2008. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," IEW - Working Papers 376, Institute for Empirical Research in Economics - University of Zurich.
    4. Agustin S. Benetrix, 2015. "International Risk Sharing and the Irish Economy," The Economic and Social Review, Economic and Social Studies, vol. 46(1), pages 29-49.
    5. Michael Artis & Toshihiro Okubo, 2011. "The intranational business cycle in Japan," Oxford Economic Papers, Oxford University Press, vol. 63(1), pages 111-133, January.
    6. Peter Fuleky & L Ventura & Qianxue Zhao, 2013. "Common correlated effects and international risk sharing," Working Papers 201304, University of Hawaii at Manoa, Department of Economics.
    7. von Furstenberg, George M., 2004. "Consumption Smoothing Across States and Time: International Insurance vs. Foreign Loans," Discussion Paper Series 1: Economic Studies 2004,13, Deutsche Bundesbank.
    8. repec:hae:wpaper:2013-3 is not listed on IDEAS
    9. Thierry Bracke & Martin Schmitz, 2011. "Channels of international risk-sharing: capital gains versus income flows," International Economics and Economic Policy, Springer, vol. 8(1), pages 45-78, April.
    10. Stefan Gerlach & Mathias Hoffmann, 2008. "The Impact of the Euro on International Stability and Volatility," European Economy - Economic Papers 2008 - 2015 309, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    11. Pierucci, Eleonora & Ventura, Luigi, 2012. "International risk sharing and globalization," MPRA Paper 35869, University Library of Munich, Germany.
    12. Kim, Heeho & Cho, Seong-Hoon & Kim, Yongku, 2015. "Home bias, risk differential, and cultural spatial spillover effects," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 114-136.
    13. Eleonora Pierucci & Luigi Ventura, 2011. "On international risk sharing and financial globalization: some gloomy evidence," Departmental Working Papers of Economics - University 'Roma Tre' 0124, Department of Economics - University Roma Tre.
    14. Aidan Corcoran, 2008. "International Financial Integration and Consumption Risk Sharing," The Institute for International Integration Studies Discussion Paper Series iiisdp241, IIIS.
    15. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, vol. 89(2), pages 258-270, July.
    16. Thomas Nitschka, 2008. "The Risk Premium on the Euro Area Market Portfolio: The Role of Real Estate," IEW - Working Papers 385, Institute for Empirical Research in Economics - University of Zurich.
    17. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.
    18. Eleonora Pierucci & Luigi Ventura, 2010. "Risk Sharing: A Long Run Issue?," Open Economies Review, Springer, vol. 21(5), pages 705-730, November.

    More about this item

    Keywords

    consumption risk sharing; home bias; international and regional business cycles; non-stationary panel data;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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