Moser, Gabriel; Pointner, Wolfgang; Scharler, Johann --- "International risk sharing in Europe: has anything changed?" [2004] ELECD 167; in Liebscher, Klaus; Christl, Josef; Mooslechner, Peter; Ritzberger-Grünwald, Doris (eds), "The Economic Potential of a Larger Europe" (Edward Elgar Publishing, 2004)

Book Title: The Economic Potential of a Larger Europe

Editor(s): Liebscher, Klaus; Christl, Josef; Mooslechner, Peter; Ritzberger-Grünwald, Doris

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843769620

Section: Chapter 22

Section Title: International risk sharing in Europe: has anything changed?

Author(s): Moser, Gabriel; Pointner, Wolfgang; Scharler, Johann

Number of pages: 17

Extract:

22. International risk sharing in
Europe: has anything changed?
Gabriel Moser, Wolfgang Pointner and
Johann Scharler1

1. INTRODUCTION
It is well known that developed financial markets allow investors to
efficiently pool idiosyncratic risk. Agents can protect themselves against
stochastic fluctuations in their incomes through trading in assets with
appropriate payoff structures. Open and integrated financial markets allow
them to choose from a larger set of assets and to pool risks across borders.
However, the usual finding in the literature is that international risk
sharing is rather limited.2 Backus et al. (1992) demonstrate that cross-
country consumption correlations are too low to be consistent with a
model characterized by complete markets and perfect capital mobility. In
addition, French and Poterba (1991) report a large home bias in equity
holdings and consequently only a small degree of international diversifica-
tion. Moreover, various authors have empirically tested for risk sharing
using consumption data and find that the implications of complete market
models are largely rejected.3 In particular, a common result is that the cross-
country correlations of output growth rates are higher than those of con-
sumption growth rates, which indicates that the opportunities for
international risk sharing are not fully exploited. Moreover, consumption
is usually found to react to country specific shocks, which is inconsistent
with perfect risk sharing.
However, the ongoing process of globalization and financial market inte-
gration has increased the amount of international financial transactions.
Tesar and Werner (1998) present some evidence that the home bias,
although ...