Financial Markets and International Risk Sharing in Emerging Market Economies

25 Pages Posted: 27 Jul 2012

Date Written: July 5, 2012

Abstract

In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short and medium term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets.

Keywords: International risk sharing, capital gains, cross-border investment, financial globalisation, emerging market economies

JEL Classification: F21, F30, G15

Suggested Citation

Schmitz, Martin, Financial Markets and International Risk Sharing in Emerging Market Economies (July 5, 2012). ECB Working Paper No. 1451, Available at SSRN: https://ssrn.com/abstract=2101194 or http://dx.doi.org/10.2139/ssrn.2101194

Martin Schmitz (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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