World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

Athanasoulis, Stefano G.; Shiller, Robert J.

doi:10.1257/aer.91.4.1031

Cited by 43 publications

(56 citation statements)

References 31 publications

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“…Our finding of a premium on world risk confirms the large welfare gains of international financial integration estimated by Athanasoulis and Shiller (2001), Athanasoulis and van Wincoop (2000), Obstfeld (1994b) and others. The fact that this premium exists even without a formal market for "world shares" makes more pressing the recommendation of Athanasoulis and Shiller (2000) concerning the need for such a world market.…”

supporting

confidence: 90%

“…We now consider the equilibrium in a multicountry economy. 4 We assume that each country has a representative investor with Duffie-Epstein preferences. However, preference parameters may vary across countries, most importantly the risk aversion coefficient that governs the amount of risk-taking.…”

Section: Equilibrium In An Integrated World Economymentioning

confidence: 99%

“…These asset demands imply that all investors hold risky assets in the same proportions. This corresponds to the mutual-fund theorem, first 4 The classic reference for general equilibrium models in continuous time is Cox, Ingersoll, and Ross (1985). 5 Many papers assume that risk aversion is the same across countries, which effectively shuts down differences in risk-taking.…”

Section: Equilibrium In An Integrated World Economymentioning

confidence: 99%

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International Risk-Taking, Volatility, and Consumption Growth

Giduskova

Larraín

2006

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes.You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. licence. www.econstor.eu [6][7][8][9][10][11][12][13][14][15][16][17] International Risk-Taking, Volatility, and Consumption Growth If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated Maria Giduskova and Borja Larrain AbstractWe show that countries that take on more international risk are rewarded with higher expected consumption growth. International risk is defined as the beta of a country's consumption growth with world consumption growth. High-beta countries hold more foreign assets, as predicted by the theory. Despite the positive effects of beta, a country's idiosyncratic volatility is negatively correlated with expected consumption growth. Therefore, uninsured shocks affect not only current growth, but also future consumption growth. High-volatility countries have worse net foreign asset positions, suggesting that solvency constraints limit their future growth. By empirically identifying the welfare implications of different risks, this paper highlights the potential benefits of financial integration and financial innovation. Our finding of a premium on world risk confirms the large welfare gains of international financial integration estimated by Athanasoulis and Shiller (2001), Athanasoulis and van Wincoop (2000), Obstfeld (1994b) and others. The fact that this premium exists even without a formal market for "world shares" makes more pressing the recommendation of Athanasoulis and Shiller (2000) concerning the need for such a world market. In addition, our results indicate that insurance mechanisms for some idiosyncratic shocks are still missing and can have long-lasting consequences if created.Our results are also interesting from the perspective of the empirical growth literature.Beta and idiosyncratic volatility are two powerful predictors of per capita consumption growth in our sample of 74 countries over the last 50 years, particularly at medium-run horizons between 3 and 10 years. These risk measures have forecasting power above and beyond traditional growth determinants such as the ratio of investment to GDP...

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supporting

confidence: 90%

Section: Equilibrium In An Integrated World Economymentioning

confidence: 99%

Section: Equilibrium In An Integrated World Economymentioning

confidence: 99%

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International Risk-Taking, Volatility, and Consumption Growth

Giduskova

Larraín

2006

SSRN Journal

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“…Appendix: A Sample Analysis for Derivatives Based on National Incomes Athanasoulis and Shiller (2001) proposed the introduction of a small number (one or two) of derivative securities based on a weighted average (possibly negatively in some countries) of the GDP growth of countries in the G-7. That is, the derivatives were to pay out when the GDP of some countries rose and to lose value when the GDP of others fell.…”

Section: Resultsmentioning

confidence: 99%

“…Suppose that the primary speculative concern about the product related to simple differences in beliefs. Athanasoulis and Shiller (2001) and Simsek (2011) provide a detailed quantitative, prospective analysis of this sort for derivatives based on the performance of national economies. They use economic modeling and publicly available data on how individuals' consumption and wealth moved with the performance of their national economies and how surveyed opinions about the future path of the economy differed across individuals.…”

Section: A Test For Evaluating Financial Innovationmentioning

confidence: 99%

A Proposal for Limiting Speculation on Derivatives: An FDA for Financial Innovation

Posner

Weyl

2012

SSRN Journal

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Abstract. The financial crisis of 2008 was caused in part by speculative investment in sophisticated derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. Most discussions center on enhanced disclosure and the use of exchanges and clearinghouses. However, we argue that disclosure rules do not address the real problem, which is that financial firms invest enormous resources to develop financial products that facilitate gambling and regulatory arbitrage, both of which are socially wasteful activities. We propose that when investors invent new financial products, they be forbidden to market them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if and only if they satisfy a test for social utility. The test centers around a simple market analysis: is the product likely to be used more often for hedging or speculation? Other factors may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common-law insurable interest doctrine, which helped control financial speculation before deregulation in the 1990s.

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Defining residual risk-sharing opportunities: Pooling world income components

Athanasoulis

Shiller

2002

Research in Economics

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World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

Cited by 43 publications

References 31 publications

International Risk-Taking, Volatility, and Consumption Growth

International Risk-Taking, Volatility, and Consumption Growth

A Proposal for Limiting Speculation on Derivatives: An FDA for Financial Innovation

Defining residual risk-sharing opportunities: Pooling world income components

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