International Risk Sharing is Better Than You Think (or Exchange Rates are Much Too Smooth)

Michael W. Brandt, John Cochrane and Pedro Santa-Clara

No 8404, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2001-07
New Economics Papers: this item is included in nep-ifn
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published as Brandt, Michael W., John H. Cochrane and Pedro Santa-Clara. "International Risk Sharing Is Better Than You Think, Or Exchange Rates Are Too Smooth," Journal of Monetary Economics, 2006, v53(4,May), 671-698.

Downloads: (external link)
http://www.nber.org/papers/w8404.pdf (application/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:nbr:nberwo:8404

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w8404

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().