Consumption, Stock Returns, and the Gains from International Risk-Sharing

42 Pages Posted: 1 Aug 2000 Last revised: 21 Mar 2008

See all articles by Karen K. Lewis

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: January 1996

Abstract

Standard theoretical models predict that domestic residents should diversify their portfolios into foreign assets much more than observed in practice. Whether this lack of diversification is important depends upon the potential gains from risk-sharing. General equilibrium models and consumption data tend to find that the costs are small, typically less than «% of permanent consumption. On the other hand, stock returns imply gains that are several hundred times larger. In this paper, I examine the reasons for these differences. I find that the primary differences are due to either: (a) the much higher variability of stocks, and/or (b) the higher degree of risk aversion required to reconcile an international equity premium. On the other hand, the significant differences do not arise treating stock returns as exogenous.

Suggested Citation

Lewis, Karen Kay, Consumption, Stock Returns, and the Gains from International Risk-Sharing (January 1996). NBER Working Paper No. w5410, Available at SSRN: https://ssrn.com/abstract=225470

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

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National Bureau of Economic Research (NBER)

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