International dynamic risk sharing

Cavaliere, Giuseppe ; Fanelli, Luca ; Gardini, Attilio (2006) International dynamic risk sharing. Bologna, IT: Dipartimento di Scienze Statistiche "Paolo Fortunati", Università degli Studi di Bologna, p. 34. DOI 10.6092/unibo/amsacta/2256. In: Quaderni di Dipartimento. Serie Ricerche ISSN 1973-9346.
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In this paper we examine the formal implications of international risk sharing among a set of countries in the presence of market frictions and forward-looking behaviour. We show that if frictions prevent consumption to adjust instantaneously toits optimal long run level, consumption streams in the countries belonging to the risk sharing pool change over time according to a dynamic disequilibrium model wich can be nested within an error-correcting vector autoregressive process. Econometric methods for testing the restrictions imposed by the theory at both short and long horizons are proposed and discussed. The empirical analysis of a set of core European countries suggest that consumption data do not seem to contrast neither with the existence of risk sharing against permanent income fluctuations and integrated capital markets, nor with a gradual and interrelated process of adjustment towards the equilibrium. The apparent lack of risk sharing in Europe documented in earlier works might depend not only on the misspecification of the short run dynamics of consumption, but also on the relatively low speed of adjustment toward the equilibrium.

Document type
Monograph (Working Paper)
Cavaliere, Giuseppe
Fanelli, Luca
Gardini, Attilio
Deposit date
16 Oct 2006
Last modified
16 May 2011 12:04

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