Asset Prices and Risk Sharing in Open Economies

Stathopoulos, Andreas

doi:10.1093/rfs/hhw074

Cited by 56 publications

(20 citation statements)

References 42 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…This analysis demonstrates how the framework can expand the number of countries over the two-country models of Croce (2010, 2012) and Stathopoulos (2012). In principle, however, the multi-country framework described in Section 2 applies to an arbitrary number of countries.…”

Section: More Countriesmentioning

confidence: 90%

“…To treat all targets equally, we report the estimates using the identity matrix. 35 The set of parameter values that minimizes this difference is the SMM estimate.…”

Section: C2 Solutions and Simulated Methods Of Momentsmentioning

confidence: 99%

“…Using these eight moments per country, we fit the same three consumption parameters along with the standard 34 See Gallant and Tauchen (1999) for a discussion on efficient method of moments and problems with moment selection. 35 We also implemented the reduced SMM procedure using a diagonal matrix with typical components equal to the sample variance. This procedure gave qualitatively similar results.…”

Section: C2 Solutions and Simulated Methods Of Momentsmentioning

confidence: 99%

“…Barro (2006) follows Reitz (1988) in assuming that investors price disaster risk. 4 Colacito and Croce (2010) and Stathopoulos (2012) are important exceptions. Below we describe how our analyses differ.…”

mentioning

confidence: 99%

See 3 more Smart Citations

Evaluating international consumption risk sharing gains: An asset return view

Lewis

Liu

2015

Journal of Monetary Economics

View full text Add to dashboard Cite

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.

show abstract

Section: More Countriesmentioning

confidence: 90%

“…To treat all targets equally, we report the estimates using the identity matrix. 35 The set of parameter values that minimizes this difference is the SMM estimate.…”

Section: C2 Solutions and Simulated Methods Of Momentsmentioning

confidence: 99%

Section: C2 Solutions and Simulated Methods Of Momentsmentioning

confidence: 99%

mentioning

confidence: 99%

See 2 more Smart Citations

Evaluating international consumption risk sharing gains: An asset return view

Lewis

Liu

2015

Journal of Monetary Economics

View full text Add to dashboard Cite

show abstract

“…In contrast, Farhi and Gabaix (2016) rely on correlated disaster risk. Finally, Stathopoulos (2016) analyzes a model in which the representative investor has preferences with external habit persistence, which induces high correlation of the pricing kernels, despite the low correlation of current consumption growth.…”

mentioning

confidence: 99%

Why Are Exchange Rates So Smooth? A Household Finance Explanation

Chien

Lustig

Naknoi

2015

View full text Add to dashboard Cite

Empirical moments of asset prices and exchange rates imply that pricing kernels are almost perfectly correlated across countries. Otherwise, observed real exchange rates would be too smooth for high Sharpe ratios. However, the cross-country correlation among macro fundamentals is weak. We reconcile these facts in a two-country stochastic growth model with heterogeneous households and a home bias in consumption. In our model, only a small fraction of households trade domestic and foreign equities. We show that this mechanism can quantitatively account for the smoothness of exchange rates in the presence of volatile pricing kernels and weakly correlated macro fundamentals.

show abstract

Risk aversion heterogeneity and the investment–uncertainty relationship

Femminis

2018

J Econ

View full text Add to dashboard Cite

A simple dynamic general-equilibrium model of savings and investment is populated by agents with Epstein-Zin preferences. Households are heterogeneous in their risk aversion, and trade riskless assets to share the aggregate risk. In equilibrium a higher volatility increases the certainty-equivalent future return for low-risk-averse individuals, who hold a long position in risky assets. The certainty-equivalent return may also increase for high-risk-averse agents, who hold safe assets. In response to a rise in certainty-equivalent expected returns, savings and investment decrease due to a limited willingness to substitute consumption over time. This generates a negative response of aggregate investment to an increase in systematic volatility.

show abstract

Asset Prices and Risk Sharing in Open Economies

Cited by 56 publications

References 42 publications

Evaluating international consumption risk sharing gains: An asset return view

Evaluating international consumption risk sharing gains: An asset return view

Why Are Exchange Rates So Smooth? A Household Finance Explanation

Risk aversion heterogeneity and the investment–uncertainty relationship

Contact Info

Product

Resources

About