International Risk Sharing is Better Than You Think (or Exchange Rates are Much Too Smooth) / Michael W. Brandt, John H. Cochrane, Pedro Santa-Clara.

Format:

Book

Author/Creator:

Brandt, Michael W.

Contributor:

National Bureau of Economic Research.

Cochrane, John H.

Santa-Clara, Pedro.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8404.

NBER working paper series no. w8404

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

International Risk Sharing is Better Than You Think

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

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.

Notes:

Print version record

July 2001.