International Risk Sharing : Through Equity Diversification or Exchange Rate Hedging?

Author/Editor:

Akito Matsumoto ; Charles Engel

Publication Date:

July 1, 2009

Electronic Access:

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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:

Well-known empirical puzzles in international macroeconomics concern the large divergence of equilibrium outcomes for consumption across countries from the predictions of models with full risk sharing. It is commonly believed that these risk-sharing puzzles are related to another empirical puzzle-the home-bias in equity puzzle. However, we show in a series of dynamic models that the full risk sharing equilibrium may not require much diversification of equity portfolios when there is price stickiness of the degree typically calibrated in macroeconomic models. This conclusion holds under a range of assumptions about home bias in preferences, price setting as PCP or LCP, and with or without nominal wage stickiness as long as there is some price rigidity.

Series:

Working Paper No. 09/138

Subject:

English

Publication Date:

July 1, 2009

ISBN/ISSN:

9781451872859/1018-5941

Stock No:

WPIEA2009138

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

46

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