Stochastic Discount Factor Approach to International Risk-Sharing: Evidence from Fixed Exchange Rate Episodes

Metodij Hadzi-Vaskov and Clemens Kool

No 07-33, Working Papers from Utrecht School of Economics

Abstract: This paper presents evidence of the stochastic discount factor approach to international risk-sharing applied to fixed exchange rate regimes. We calculate risk-sharing indices for two episodes of fixed or very rigid exchange rates: the Eurozone before and after the introduction of the Euro, and several emerging economies in the period 1993-2005. This approach suggests almost perfect bilateral risk-sharing among all countries from the Eurozone. Moreover, it implies that emerging markets with fixed/rigid nominal exchange rates against the US dollar in the period achieved almost perfect risk-sharing with the US. We conclude that risk-sharing measures crucially depend on the behavior of the nominal exchange rate, implying almost perfect risk-sharing among countries with fixed/rigid nominal exchange rates. Second, a counterintuitive ranking of the risk-sharing levels under different nominal exchange rate regimes suggests a limited use of this approach for cross-country risk-sharing comparisons. Real exchange rates might be very smooth, but risk-sharing across countries is not necessarily perfect.

Keywords: International Risk-Sharing; Stochastic Discount Factor; Fixed Exchange Rates; Exchange Rate Regimes (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-bec, nep-cba and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:use:tkiwps:0733

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