International Risk Sharing

Devereux, Michael B. and Kollmann, Robert (2012): International Risk Sharing. Published in: Canadian Journal of Economics , Vol. 45 (2), (May 2012): pp. 373-375.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: international risk sharing, consumption risk, financial market integration, globalization
• Subjects: F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F6 - Economic Impacts of Globalization

References

Balli, Faruk, Sebnem Kalemli-Ozcan and Bent E. Sørensen, 2012. Risk sharing through capital gains, Canadian Journal of Economics 45, 472-492.

Baxter, Marianne, 2012. International risk-sharing in the short run and in the long run, Canadian Journal of Economics 45, 376-393.

Benigno, Gianluca and Hande Küçük, 2012. Portfolio allocation and international risk sharing. Canadian Journal of Economics 45, 535–565.

Berka, Martin, Mario Crucini and Chih-Wei Wang, 2012. International risk sharing and commodity prices. Canadian Journal of Economics 45, 417-447.

Corsetti, Giancarlo, Luca Dedola and Francesca Viani, 2012. The international risk sharing puzzle is at business cycle and lower frequency. Canadian Journal of Economics 45, 448-471.

Devereux, Michael B. and Viktoria Hnatkovska, 2012. The extensive margin, sectoral shares, and international business cycles. Canadian Journal of Economics 45, 509-534.

Flood, Robert, Nancy Marion and Akito Matsumoto. 2012. International risk sharing during the globalization era. Canadian Journal of Economics 45, 394-416.

Hoffmann, Mathias and Thomas Nitschka, 2012. Securitization of mortgage debt, domestic lending, and international risk sharing. Canadian Journal of Economics 45, 493-508.

Kollmann, Robert, 2012. Limited asset market participation and the consumption-real exchange rate anomaly. Canadian Journal of Economics 45, 566-584.