International Risk Sharing is Better Than You Think (or Exchange Rates are Much Too Smooth)
Michael W. Brandt,
John Cochrane and
Pedro Santa-Clara
Additional contact information
Michael W. Brandt: U of Pennsylvania
Working Papers from University of Pennsylvania, Wharton School, Weiss Center
Abstract:
Exchange rates depreciate by the difference between the domestic and foreign marginal utility growths. Exchange rates vary a lot, as much as 10% per year. However, equity premia imply that marginal utility growths vary much more, by at least 50% per year. This means that marginal utility growths must be highly correlated across countries--international risk sharing is better than you think. Conversely, if risks really are not shared internationally, exchange rates should vary more than they do--exchange rates are much too smooth. We calculate an index of international risk sharing that formalizes this intuition in the context of both complete and incomplete capital markets. Our results suggest that risk sharing is indeed very high across several pairs of countries.
Date: 2001-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)
Downloads: (external link)
http://www.stern.nyu.edu/~rengle/pdfs/riskshare.pdf
Related works:
Working Paper: International Risk Sharing is Better Than You Think (or Exchange Rates are Much Too Smooth! (2001) 
Working Paper: International Risk Sharing is Better Than You Think (or Exchange Rates are Much Too Smooth) (2001) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ecl:upafin:01-2
Access Statistics for this paper
More papers in Working Papers from University of Pennsylvania, Wharton School, Weiss Center Contact information at EDIRC.
Bibliographic data for series maintained by ().