Global Risk Sharing through Trade in Goods and Assets: Theory and Evidence

Inga Heiland

No 14230, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Exporting not only provides firms with profit opportunities, but can also provide for risk diversification if is demand is stochastic and shocks are imperfectly correlated across countries. I develop a general equilibrium trade model, with risk-averse investors and complete asset markets, to show that the correlation pattern of demand shocks across countries constitutes a hitherto unexplored source of comparative advantage that shapes trade flows and persists even if financial markets are complete. The model yields a risk-augmented gravity equation, predicting that, conditional on trade costs and market size, exporters sell smaller quantities to countries whose shocks contribute more to aggregate volatility. I estimate the risk-augmented gravity equation using thirty years of data on trade flows and find support for the model’s prediction. A counterfactual experiment shows that demand-risk-based comparative advantage accounts for 4.6% of global trade.

Keywords: International trade; Structural gravity; Global risk sharing (search for similar items in EconPapers)
JEL-codes: F15 F36 F44 G11 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (1)

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Working Paper: Global Risk Sharing Through Trade in Goods and Assets: Theory and Evidence (2016)
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