Limited Risk Sharing and International Equity Returns

Shaojun Zhang

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: I study international risk sharing with limited stock market participation and preference heterogeneity in each country. An incomplete market model jointly generates high cross-country equity return correlation and low aggregate consumption growth correlation, while matching salient features of asset prices. The model further generates several implications that I show in the data: 1) The stockholders' cross-country consumption growth correlation is considerably higher than that of the aggregate; 2) International bond flows help agents share the labor income risk only, while the country-specific financial income fluctuations are negatively correlated with equity inflows only; 3) The stockholders' consumption risk is priced in both the home and foreign equity markets. I show that the financial integration significantly improves the stockholders' welfare without benefiting the non-stockholders.

JEL-codes: F30 F41 F44 F62 F65 G11 G12 G15 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (1)

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Journal Article: Limited Risk Sharing and International Equity Returns (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2016-25

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