Limited Risk Sharing and International Equity Returns

Fisher College of Business Working Paper No. 2016-03-025

Charles A. Dice Center Working Paper No. 2016-25

58 Pages Posted: 1 Jan 2014 Last revised: 11 Aug 2019

Date Written: July 1, 2019

Abstract

Limited stock market participation can potentially explain the disconnect between international asset prices and macro quantities. An incomplete markets model in which risk sharing for stockholders is high, generates highly correlated equity returns and relatively smooth exchange rates. Risk sharing for non-stockholders is limited because of their non-participation in stock markets and borrowing constraints, lowering aggregate consumption correlation and the correlation between aggregate consumption differentials and exchange rates. Further, financial integration widens the disconnect by benefiting stockholders but hurting non-stockholders. Survey data indicate that international risk sharing for stockholders is better than that for non-stockholders, lending support to the predictions.

Keywords: comovement, exchange rate, limited participation, equity return, incomplete markets

JEL Classification: F30, F41, F44, F62, F65, G11, G12, G15

Suggested Citation

Zhang, Shaojun, Limited Risk Sharing and International Equity Returns (July 1, 2019). Charles A. Dice Center Working Paper No. 2016-25. Available at SSRN: https://ssrn.com/abstract=2373265 or http://dx.doi.org/10.2139/ssrn.2373265

Shaojun Zhang (Contact Author)

The Ohio State University

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/view/zhangshaojun

Register to save articles to
your library

Register

Paper statistics

Downloads
379
Abstract Views
2,234
rank
77,490
PlumX Metrics