Aggregate Income Risks and Hedging Mechanisms
Estimates are made, from time series data on real gross domestic products, of the standard deviations of returns in markets for perpetual claims on countries' incomes. The results indicate that the variability of returns is of a magnitude comparable to that of returns in stock markets. Evidence is shown that there may be only minimal possibility of cross hedging these returns in existing capital markets. Methods of establishing markets for perpetual claims on aggregate incomes are examined. Such markets, by allowing hedging of these aggregate income risks, might make for dramatically more effective international macroeconomic risk sharing than is possible today. Retail institutions are described that might develop around such markets and help the public with their risk management. However, the establishment of such markets would also incur the risk of major financial bubbles and panics.