Risk sharing among economic sectors

Faruk, Balli and Eleonora, Pierucci (2016): Risk sharing among economic sectors.

Abstract

We investigate risk sharing channels across different economic sectors to quantify to what extent they contribute offsetting idiosyncratic shocks. We examine the two most relevant channels of smoothing among OECD and EU countries: the international investment income and the savings channels. We find that the households' share in net foreign asset income has a significant role in risk sharing. This surprising result is strictly related to the accumulation of households' foreign asset holdings. On the contrary, governments' cross-border holdings produce a dis-smoothing effect and this might be imputable to the holding of EU countries' assets. This outcome is reversed for the new EU countries in the post Global Financial Crisis (GFC) period. With regard to the savings channel, we find that governments significantly contribute to risk sharing, and more significantly after the inception of the GFC. Moreover, the dividend smoothing theory reconciles with the risk-sharing findings since corporations (in particular non financial) significantly smooth shocks through their savings, however their contribution to risk sharing is weak in the post-GFC era.

• Item Type: MPRA Paper
• Language: English
• Keywords: Risk sharing, savings, net factor income, economic sectors.
• Subjects: F - International Economics > F2 - International Factor Movements and International Business; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F24 - Remittances; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission

References

Artis, M. J. and M. Hoffmann (2008). Financial globalization, international business cycles and consumption risk sharing. Scandinavian Journal of Economics 110 (3), 447-471.

Asdrubali, P., B. E. Sorensen, and O. Yosha (1996). Channels of interstate risk sharing: United States 1963-1990. The Quarterly Journal of Economics 111 (4), 1081-1110.

Balli, F., S. A. Basher, and R. J. Louis (2013). Risk sharing in the Middle East and North Africa. Economics of Transition 21 (1), 135-155.

Balli, F., S. A. Basher, and H. Ozer-Balli (2011). Income insurance and the determinants of income insurance via foreign asset revenues and foreign liability payments. Economic Modelling 28 (5), 2296-2306.

Balli, F., S. Kalemli-Ozcan, and B. E. Sorensen (2012). Risk sharing through capital gains. Canadian Journal of Economics/Revue canadienne d'conomique 45 (2), 472-492.

Balli, F., F. M. Pericoli, and E. Pierucci (2014). Foreign portfolio diversification and risk-sharing. Economics Letters 125 (2), 187-190.

Balli, F. and F. Rana (2015). Determinants of risk sharing through remittances. Journal of Banking & Finance 55, 107-116.

Balli, F. and B. E. Sorensen (2006). The impact of the EMU on channels of risk sharing between member countries. In Proceedings of the Conference on Human and Economic Resources, Papers of the Annual IUE-SUNY Cortland Conference in Economics, pp. 399-429. Izmir University of Economics.

Bracke, T. and M. Schmitz (2011). Channels of international risk-sharing: capital gains versus income flows. International Economics and Economic Policy 8 (1), 45-78.

Demyanyk, Y. and V. Volosovych (2008). Gains from financial integration in the european union: Evidence for new and old members. Journal of International Money and Finance 27 (2), 277-294.

European Central Bank (2011). Financial integration in europe. Technical report, European Central Bank.

Gali, J. and R. Perotti (2003). Fiscal policy and monetary integration in Europe. Working Paper 9773, National Bureau of Economic Research.

International Fund for Agricultural Development (2015). Sending money home: European flows and markets. Technical report, International Fund for Agricultural Development.

Kahanec, M., A. Zaiceva, and K. Zimmermann (2010). Lessons from migration after EU enlargement. In M. Kahanec and K. F. Zimmermann (Eds.), EU Labor Markets After Post-Enlargement Migration, pp. 3-45. Springer Berlin Heidelberg.

Kose, M. A., E. Prasad, and M. Terrones (2003). Financial integration and macroeconomic volatility. IMF Working Papers 03/50, International Monetary Fund.

Kose, M. A., E. S. Prasad, and M. E. Terrones (2009). Does financial globalization promote risk sharing? Journal of Development Economics 89 (2), 258-270.

Sorensen, B. E., Y.-T. Wu, O. Yosha, and Y. Zhu (2007). Home bias and international risk sharing: Twin puzzles separated at birth. Journal of International Money and Finance 26 (4), 587-605.

Sorensen, B. E. and O. Yosha (1998). International risk sharing and european monetary unification. Journal of International Economics 45 (2), 211-238.