Risk Sharing in International Economies and Market Incompleteness

Gurdip Bakashi, Mario Cerrato and John Crosby

Working Papers from Business School - Economics, University of Glasgow

Abstract: We develop an incomplete markets framework to show that international risk sharing can be low, particularly among countries with large interest-rate differentials. Furthermore, risk sharing computed from asset returns can be consistent with that computed from consumption. The key difference from Brandt, Cochrane, and Santa-Clara (2006) is that exchange rate growth need not equal the ratio of stochastic discount factors (SDF), and we develop a restriction that precludes “good deals” in international economies with incomplete markets. We compute the lowest risk sharing consistent with SDFs that (i) are nonnegative, (ii) correctly price returns, and (iii) disallow “good deals.”

Keywords: International risk sharing; incomplete markets; exchange rates (search for similar items in EconPapers)
JEL-codes: E44 F31 F36 G12 G15 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-mac, nep-opm and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2015_23

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