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Asset Prices and Risk Sharing in Open Economies

60 Pages Posted: 20 Mar 2009 Last revised: 22 Jun 2016

Andreas Stathopoulos

University of Washington

Date Written: May 1, 2016

Abstract

This paper proposes a two-country model that features time-varying heterogeneity in conditional risk aversion across countries, endogenously arising from the interaction between external habit formation and preference home bias. The model generates high international correlation of state prices along with modest cross-country consumption growth correlation and matches the empirical disconnect between exchange rate changes and consumption growth rate differentials. The key mechanism is endogenous time variation in conditional consumption growth volatility: the conditionally less risk averse country insures the more risk averse one, offsetting cross-country heterogeneity in conditional risk aversion and leading to significant international comovement in marginal utility growth.

Keywords: Risk sharing, asset pricing, international finance, home bias, habit formation, exchange rates

JEL Classification: G12, G15, F31

Suggested Citation

Stathopoulos, Andreas, Asset Prices and Risk Sharing in Open Economies (May 1, 2016). Available at SSRN: https://ssrn.com/abstract=1364082 or http://dx.doi.org/10.2139/ssrn.1364082

Andreas Stathopoulos (Contact Author)

University of Washington ( email )

Seattle, WA 98195
United States

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