The impact of international portfolio composition on consumption risk sharing

Abstract

Recent empirical work has shown that ongoing international financial integration facilitates cross-country consumption risk-sharing. These studies typically find that countries with high equity home bias exhibit relatively low international consumption risk sharing. We extend this line of research and demonstrate that it is not only a country's equity home bias that prevents consumption risk sharing. In addition, the composition of a country's foreign asset portfolio plays an important role. Using panel-data regression for a group of OECD countries over the period 1980-2007, we show that foreign investment bias has additional explanatory power for consumption risk sharing.

Partial Consumption Insurance and Financial Openness across the World

“…Column 2 of Table 3 adds to the total foreign asset and liability stocks a measure of their composition, speci…cally distinguishing between FDI and other types of foreign assets and liabilities, to test whether direct investment is di¤erent regarding its contribution to risk sharing. 17 In contrast with the preceding column, the estimated coe¢ cients on FDI asset and liability positions, relative to overall asset and liability stocks, carry opposing signs, suggesting that residents'direct investment abroad helps risk sharing more than other types of foreign asset holdings, but non-residents'direct investment at home has the opposite e¤ect.…”

“…Using the parameter estimates summarized in Table 1, the innovations to permanent income can be readily constructed employing (17). We construct two sets of innovations, corresponding to the …rst and third model speci…cations in the table; we leave aside the second speci…cation because of the unstable root mentioned earlier.…”

The Effect of Immigration on Economic Growth in an Ageing Economy

“…Although the home bias holdings in the Netherlands is relatively small compared to other countries (see Sørensen et al (2007)), it is still considerable. Holinski et al (2012) find a decrease in the home bias for equity from 0.64 in 1990 to 0.14 in 2005 in the Netherlands. However, (Baele et al (2007), Sørensen et al (2007), Schoenmaker and Bosch (2008) find values of 0.37 for 2003, between 0.3 and 0.4 in 2004 (depending on the method used), and 0.43 in 2004, respectively, for the Netherlands.…”

Assessing the degree of international consumption risk sharing

“…Kose, Prasad and Terrones (2009) argue that risk sharing has risen among industrial countries (but not among developing countries), and the rise is correlated with the increase in gross foreign assets and liabilities over the globalization period. Holinski, Kool and Muysken (2012) also examine how international consumption risk sharing relates to various features of countries' equity portfolios. These papers base their conclusions on conventional risk-sharing regressions, and thus they are subject to the criticism that, strictly speaking, such regressions do not provide a solid basis for inferences about the extent of partial risk sharing.…”

“…See, for example,Sørensen et al (2007),Kose, Prasad and Terrones (2009),Fratzscher and Imbs (2009), andHolinski, Kool and Muysken (2012).29 The variables in X are measured as time averages. The functional form we use is λ = exp(Xδ), which offers the advantage of preventing negative values ofλ.…”