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Limited Risk Sharing and International Equity Returns

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  • Zhang, Shaojun

    (Ohio State University)

Abstract

I study international risk sharing with limited stock market participation and preference heterogeneity in each country. An incomplete market model jointly generates high cross-country equity return correlation and low aggregate consumption growth correlation, while matching salient features of asset prices. The model further generates several implications that I show in the data: 1) The stockholders' cross-country consumption growth correlation is considerably higher than that of the aggregate; 2) International bond flows help agents share the labor income risk only, while the country-specific financial income fluctuations are negatively correlated with equity inflows only; 3) The stockholders' consumption risk is priced in both the home and foreign equity markets. I show that the financial integration significantly improves the stockholders' welfare without benefiting the non-stockholders.

Suggested Citation

  • Zhang, Shaojun, 2016. "Limited Risk Sharing and International Equity Returns," Working Paper Series 2016-25, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2016-25
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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