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International Risk Sharing

Author

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  • Devereux, Michael B.
  • Kollmann, Robert

Abstract

According to standard theory, one of the central benefits of international financial markets is the possibility of reducing national consumption risk. A basic measure of risk sharing is hence the degree to which national consumption rates move in unison across countries. In the simplest theoretical model of international financial markets, efficient risk sharing implies that consumption growth in a given country closely tracks world consumption growth. With integrated financial markets, consumption growth should hence be highly correlated across countries--and more highly correlated than output growth. Yet, despite the liberalization of international financial markets and the strong growth in international capital flows during the past few decades, this prediction is sharply at variance with the evidence. Empirically, national consumption closely tracks national output, while cross-country consumption correlations are generally lower than cross-country output correlations. Hence, it would seem that countries are not fully exploiting the welfare benefits of international risk pooling. Documenting the pattern of (incomplete) risk sharing, and understanding the financial frictions at its roots, is thus of great interest for economic research and policy. This special issue of the Canadian Journal of Economics consists of a selection of papers that offer novel empirical and theoretical perspectives on international risk sharing. All papers were presented at a conference on ‘International Risk Sharing’ held at ECARES (Université Libre de Bruxelles), in October 2010.

Suggested Citation

  • Devereux, Michael B. & Kollmann, Robert, 2012. "International Risk Sharing," MPRA Paper 70129, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:70129
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    File URL: https://mpra.ub.uni-muenchen.de/70129/1/MPRA_paper_70129.pdf
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    References listed on IDEAS

    as
    1. Faruk Balli & Sebnem Kalemli-Ozcan & Bent E. Sørensen, 2012. "Risk sharing through capital gains," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 472-492, May.
    2. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "The international risk sharing puzzle is at business cycle and lower frequency," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 448-471, May.
    3. Robert Kollmann, 2012. "Limited asset market participation and the consumption-real exchange rate anomaly," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 566-584, May.
    4. Robert P. Flood & Nancy P. Marion & Akito Matsumoto, 2012. "International risk sharing during the globalization era," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 394-416, May.
    5. Mathias Hoffmann & Thomas Nitschka, 2012. "Securitization of mortgage debt, domestic lending, and international risk sharing," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 493-508, May.
    6. Marianne Baxter, 2012. "International risk-sharing in the short run and in the long run," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 376-393, May.
    7. Martin Berka & Mario J. Crucini & Chih-Wei Wang, 2012. "International risk sharing and commodity prices," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 417-447, May.
    8. Gianluca Benigno & Hande Küçük, 2012. "Portfolio allocation and international risk sharing," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 535-565, May.
    9. Michael B. Devereux & Viktoria Hnatkovska, 2012. "The extensive margin, sectoral shares, and international business cycles," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 509-534, May.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Kollmann, Robert, 2015. "Risk Sharing in a World Economy with Uncertainty Shocks," CEPR Discussion Papers 10940, C.E.P.R. Discussion Papers.
    2. Robert Kollmann, 2012. "Limited asset market participation and the consumption-real exchange rate anomaly," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 566-584, May.
    3. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
    4. Robert Kollmann, 2015. "Exchange Rates Dynamics with Long-Run Risk and Recursive Preferences," Open Economies Review, Springer, vol. 26(2), pages 175-196, April.
    5. Rabitsch, Katrin & Stepanchuk, Serhiy & Tsyrennikov, Viktor, 2015. "International portfolios: A comparison of solution methods," Journal of International Economics, Elsevier, vol. 97(2), pages 404-422.
    6. Kollmann, Robert, 2016. "International business cycles and risk sharing with uncertainty shocks and recursive preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 115-124.
    7. Robert Kollmann, 2015. "Exchange Rate and Current Account Dynamics: the Role of Asset Market Structure, Long-Run Risk and Risk Appetite," 2015 Meeting Papers 1397, Society for Economic Dynamics.
    8. Robert Kollmann, 2016. "Risk Sharing, the Exchange Rate and Net Foreign Assets in a World Economy with Uncertainty Shocks," 2016 Meeting Papers 721, Society for Economic Dynamics.
    9. Gurdip Bakashi & Mario Cerrato & John Crosby, 2015. "Risk Sharing in International Economies and Market Incompleteness," Working Papers 2015_23, Business School - Economics, University of Glasgow.

    More about this item

    Keywords

    international risk sharing; consumption risk; financial market integration; globalization;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization

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