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Common correlated effects and international risk sharing

  • Peter Fuleky

    ()

    (UHERO, University of Hawaii at Manoa)

  • Luigi Ventura

    ()

    (Department of Economics and Law, Sapienza, University of Rome)

  • Qianxue Zhao

    ()

    (UHERO, University of Hawaii at Manoa)

Existing studies of risk pooling among groups of countries are predicated upon the highly restrictive assumption that all countries have symmetric responses to aggregate shocks. We show that the conventional risk sharing test fails to isolate idiosyncratic fluctuations within countries and produces spurious results. To avoid these problems, we propose an alternative form of the risk sharing test that is robust to heterogeneous country characteristics. In our empirical example, we provide estimates using the proposed approach for various groupings of 158 countries.

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File URL: http://www.uhero.hawaii.edu/assets/WP_2013-3R.pdf
File Function: First version, 2013
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Paper provided by University of Hawaii Economic Research Organization, University of Hawaii at Manoa in its series Working Papers with number 2013-3R.

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Length: 28 pages
Date of creation: Mar 2013
Date of revision: Aug 2013
Handle: RePEc:hae:wpaper:2013-3r
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