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How Does Financial Globalization Affect Risk Sharing? Patterns and Channels

Author/Editor: Kose, M. Ayhan | Prasad, Eswar | Terrones, Marco
Authorized for Distribution: October 1, 2007
Electronic Access: Free Full Text (PDF file size is 426KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: In theory, one of the main benefits of financial globalization is that it should allow for more efficient international risk sharing. This paper provides a comprehensive empirical evaluation of the patterns of risk sharing among different groups of countries and examines how international financial integration has affected the evolution of these patterns. Using a variety of empirical techniques, we conclude that there is at best a modest degree of international risk sharing, and certainly nowhere near the levels predicted by theory. In addition, only industrial countries have attained better risk sharing outcomes during the recent period of globalization. Developing countries have, by and large, been shut out of this benefit. The most interesting result is that even emerging market economies, which have experienced large increases in cross-border capital flows, have seen little change in their ability to share risk. We find that the composition of flows may help explain why emerging markets have not been able to realize this presumed benefit of financial globalization. In particular, our results suggest that portfolio debt, which has dominated the external liability stocks of most emerging markets until recently, is not conducive to risk sharing.
 
Series: Working Paper No. 07/238
Subject(s): Financial integration | Globalization | Developing countries | Financial risk
Author's keyword(s): Financial integration | globalization | developing countries | risk sharing
 
English  
    Published:   October 1, 2007        
            Format:   Paper
    Stock No:   WPIEA2007238   Pages:   41
    Price:   US$18.00
       
     
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