Economic sentiments and international risk sharing

Daragh Clancy and Lorenzo Ricci

International Economics, 2022, issue 169, 208-229

Abstract: We examine an unexplored connection between economic sentiments and the degree of international risk sharing. As sentiments provide a sense of the expected direction of future income changes, if risk sharing is imperfect, countries experiencing weak sentiments should take actions to enable the smoothing of their consumption in the event this fall in income materialises. However, we find the opposite holds: weak sentiments are associated with reduced risk sharing. This finding is robust to the inclusion of alternative determinants of international risk sharing, the state of the business cycle as well as undiversifiable and persistent output fluctuations. We provide evidence that our results are consistent with loss aversion. Our findings have important implications for private initiatives and public institutions that aim to improve international risk sharing, which are usually designed on the basis of risk-averse or risk-neutral behaviour.

Keywords: Confidence; Loss aversion; Risk sharing; Uncertainty (search for similar items in EconPapers)
JEL-codes: E21 E71 F41 F44 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepiie:2022-q2-169-14

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