Declining Home Bias and the Increase in International Risk Sharing: Lessons from European Integration

29 Pages Posted: 9 Jun 2008

See all articles by Michael J. Artis

Michael J. Artis

University of Manchester - Institute for Political & Economic Governance (IPEG)

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 2007

Abstract

This paper provides further evidence on the recent increase in international consumption risk sharing. We show that this increase is more pronounced among EU and EMU countries than among non-E(M)U industrialised countries. We also show that the patterns of international but not intra-European risk sharing have started to diverge from what is found at the level of the OECD as a whole. During the 1990s, capital income flows have started to play a relatively more important role between European countries, whereas the increase in international risk sharing among the OECD as a whole is almost exclusively driven by better consumption smoothing through the accumulation or decumulation of foreign assets. This EMU effect on the pattern of risk sharing survives once we control for differences in international portfolio holdings: while we find that countries with higher equity cross-holdings also tend to share more risk through capital income flows there remains an independent EMU-effect on the way in which risk is shared. While it is too early to evaluate these findings conclusively, we discuss some possible interpretations and their implications for economic policy.

Keywords: Capital flows, Consumption Risk Sharing, EMU, Financial integration, Home Bias

JEL Classification: C23, E21, F36

Suggested Citation

Artis, Michael J. and Hoffmann, Mathias, Declining Home Bias and the Increase in International Risk Sharing: Lessons from European Integration (December 2007). CEPR Discussion Paper No. DP6617, Available at SSRN: https://ssrn.com/abstract=1140546

Michael J. Artis (Contact Author)

University of Manchester - Institute for Political & Economic Governance (IPEG) ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Mathias Hoffmann

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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