International consumption risk sharing studies often generate counterfactual implications for asset return behavior with potentially misleading results. We address this contradiction using data moments of consumption and asset returns to fit a canonical international consumption risk sharing framework. Introducing persistent consumption risk, we find that its correlation across countries is more important for risk sharing than that of transitory risk. To identify these risk components, we jointly exploit the comovement of equity returns and consumption. This identification implies high correlations in persistent consumption risk, suggesting a strong degree of existing risk sharing despite low consumption correlations in the data. October, 2012Abstract Multi-country consumption risk sharing studies that match the equity premium typically find very large gains from risk-sharing. However, these studies usually generate counterfactual implications for the risk-free rate and asset return variability. In this paper, we modify a canonical risk-sharing model to generate asset return behavior closer to the data and then consider the effects on welfare gains. To better fit asset return behavior, we introduce persistent consumption risk, finding that the welfare gains depend critically on the international correlation in this persistent risk. We then provide a new identification for this risk by jointly exploiting the data correlation for equity returns and for consumption. This identification implies high correlation in persistent consumption risk, suggesting a strong degree of diversification despite low correlations in transitory risk. As such, our findings show that matching equity returns can imply lower international risk sharing gains than previously thought. * This paper was previously circulated under the title "International Consumption Risk Is Shared After All: An Asset Return View." We thank seminar participants at the Aarhus University Globalization Conference, Arizona State University, Cornell University, the Dallas Federal Reserve Bank, the Econometric Society, INSEAD, Keio University, the NBER Summer Institute, the Philadelphia Federal Reserve Bank, UNC-Chapel Hill, the University of Pennsylvania, and the University of Southern California and in particular Ravi Bansal, Max Croce, Bernard Dumas, Sebnem Kalemli-Ozcan, Dana Kiku, Andreas Stathopoulos, Linda Tesar and Amir Yaron for valuable comments. Of course, any errors are ours alone.

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For useful comments and suggestions, we thank Charles Engel, Mick Devereux, an anonymous referee, and participants at the 2016 International Seminar on Macroeconomics, the International Conference on Capital Markets at INSEAD, and the Wharton International Finance group meeting. We are also indebted to Jessica Wachter for helpful conversations, and to Robert Barro for providing us with the asset return data. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Board. Any errors or omissions are our responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

This article examines the benefits of corporate bond diversification for U.S. investors. Analysis of a newly compiled bond-level data set for 2000–2010 finds that diversification with corporate bonds can significantly reduce volatility and increase risk-adjusted returns for U.S. investors. Unlike diversification with equities, corporate bonds offer significant out-of-sample risk reduction, particularly during the recent financial crisis. Risk-reduction gains are large even when the benchmark includes international equities or when longer samples of equities and sovereign bonds are used to inform corporate bond returns. Finally, significant risk-reduction gains remain after accounting for bond characteristics, liquidity, and informational costs.