Low Risk Sharing with Many Assets

No 361, Working Papers from University of California, Davis, Department of Economics

Abstract: Classical contributions in international macroeconomics reconcile low international risk sharing by generating a non-traded component to exchange rates. However, when there is cross-border trade in just one domestic and one foreign-currency-denominated risk-free asset, such price movements are ruled out by no-arbitrage restrictions. Allowing for within-country heterogeneity in stochastic discount factors, we recover low risk-sharing even with cross-border trade in two risk-free assets, as long as heterogeneity increases when exchange rates depreciate.

Keywords: international risk sharing; incomplete financial markets; exchange rates; heterogeneous agents (search for similar items in EconPapers)
JEL-codes: E32 F31 F44 G15 (search for similar items in EconPapers)
Pages: 52
Date: 2023-12-03
New Economics Papers: this item is included in nep-opm and nep-rmg
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Working Paper: Low Risk Sharing with Many Assets (2023)
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