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Uninsurable Risk and Financial Market Puzzles

Listed author(s):
  • Parantap Basu
  • Andrei Semenovz
  • Kenji Wadax

This paper develops an integrated model, which addresses the recent Brandt, Cochrane and Santa-Clara (2006) puzzle of reconciling low international risk sharing with a high and variable equity premium. In addition, a new currency risk premium puzzle is also addressed. Following Kocherlakota and Pistaferri (2007), we examine two market structures: (i) where private risk cannot be insured and (ii) where the private risk can be partially insured by striking long term insurance contract with truth revelation constraint. Our GMM estimation based on the US-UK .nancial and cross-sectional household spending data lends support to the second market environment.

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File URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0701.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0701.

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Date of creation: Nov 2007
Handle: RePEc:san:cdmacp:0701
Contact details of provider: Postal:
Department of Economics, University of St. Andrews, Fife KY16 9AL

Phone: 01334 462436
Fax: 01334 462444
Web page: https://www.st-andrews.ac.uk/cdma
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