Limited Risk Sharing and International Equity Returns

59 Pages Posted: 1 Jan 2014 Last revised: 8 Mar 2020

See all articles by Shaojun Zhang

Shaojun Zhang

The Ohio State University; The Vanguard Group, Inc.

Date Written: March 5, 2020


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 (March 5, 2020). Fisher College of Business Working Paper No. 2016-03-025, Charles A. Dice Center Working Paper No. 2016-25, Journal of Finance, Forthcoming, Available at SSRN: or

Shaojun Zhang (Contact Author)

The Ohio State University

2100 Neil Avenue
Columbus, OH 43210-1144
United States


The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

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