Common Correlated Effects and International Risk Sharing

Peter Fuleky, Luigi Ventura and Qianxue Zhao
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Qianxue Zhao: UHERO, University of Hawaii at Manoa

No 201612, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: Existing studies of international risk sharing rely on the highly restrictive assumption that all economies are characterized by symmetric preferences and uniform transmission of global shocks. We relax these homogeneity constraints by modeling aggregate and idiosyncratic fluctuations as unobserved components, and we use Pesaran's (2006) common correlated effects estimator to control for common factors and cross-sectional heterogeneity. We compare the proposed approach with the conventional ones using data from Penn World Table 9.0 for 120 countries. While we do not detect a significant increase in risk sharing during the last four decades, our results confirm that consumption is only partially smoothed internationally and risk sharing is directly related to the level of development.

Keywords: International risk sharing; Consumption insurance; Panel data; Cross-sectional dependence; Heterogeneous effects (search for similar items in EconPapers)
JEL-codes: C23 C51 E21 F36 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-mac and nep-opm
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http://www.economics.hawaii.edu/research/workingpapers/WP_16-12R.pdf First version, 2016 08 (application/pdf)

Related works:
Journal Article: Common correlated effects and international risk sharing (2018)
Working Paper: Common correlated effects and international risk sharing (2017)
Working Paper: Common correlated effects and international risk sharing (2016)
Working Paper: Common correlated effects and international risk sharing (2013)
Working Paper: Common correlated effects and international risk sharing (2013)
Working Paper: Common Correlated Effects and International Risk Sharing (2013)
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