Uninsurable Risk and Financial Market Puzzles

Parantap Basu, Andrei Semenovz and Kenji Wadax

CDMA Conference Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: This paper develops an integrated model, which addresses the recent Brandt, Cochrane and Santa-Clara (2006) puzzle of reconciling low international risk sharing with a high and variable equity premium. In addition, a new currency risk premium puzzle is also addressed. Following Kocherlakota and Pistaferri (2007), we examine two market structures: (i) where private risk cannot be insured and (ii) where the private risk can be partially insured by striking long term insurance contract with truth revelation constraint. Our GMM estimation based on the US-UK .nancial and cross-sectional household spending data lends support to the second market environment.

Date: 2007-11
New Economics Papers: this item is included in nep-fmk
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Working Paper: Uninsurable Risk and Financial Market Puzzles (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:san:cdmacp:0701

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