Evaluating international consumption risk sharing gains: An asset return view

Karen Lewis and Edith Liu

Journal of Monetary Economics, 2015, vol. 71, issue C, 84-98

Abstract: International consumption risk sharing studies often generate counterfactual implications for asset return behavior with potentially misleading results. We address this contradiction using data moments of consumption and asset returns to fit a canonical international consumption risk sharing framework. Introducing persistent consumption risk, we find that its correlation across countries is more important for risk sharing than that of transitory risk. To identify these risk components, we jointly exploit the comovement of equity returns and consumption. This identification implies high correlations in persistent consumption risk, suggesting a strong degree of existing risk sharing despite low consumption correlations in the data.

Keywords: Financial integration; International risk sharing; Global asset pricing (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:71:y:2015:i:c:p:84-98

DOI: 10.1016/j.jmoneco.2014.11.010

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