TY  - JOUR
AU  - Shiller,Robert J.
AU  - Athanasoulis,Stefano
TI  - World Income Components: Measuring and Exploiting International Risk Sharing Opportunities
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5095
PY  - 1995
Y2  - April 1995
UR  - http://www.nber.org/papers/w5095
L1  - http://www.nber.org/papers/w5095.pdf
N1  - Author contact info:
Robert J. Shiller
Yale University, Cowles Foundation
Box 208281
30 Hillhouse Avenue
New Haven, CT  06520-8281
Tel: 203/432-3708
Fax: 203/432-6167
E-Mail: robert.shiller@yale.edu
AB  - We provide methods of decomposing the variance of world national incomes into components in such a way as to indicate the most important risk-sharing opportunities, and, therefore, the most important missing international risk markets to establish.  One method uses a total variance reduction criterion, and identifies risk-sharing opportunities in terms of eigenvectors of a variance matrix of residuals produced when country incomes are regressed on world income.  Another method uses a mean-variance utility-maximizing criterion and identifies risk-sharing opportunities in terms of eigenvectors of a variance matrix of deviations of country incomes from their respective contract-year shares of world income. The two methods are applied using Summers-Heston (1991) data on national incomes for large countries 1950-1990, each using two different methods of estimating variances.  While these data are not sufficient to provide accurate estimates of the requisite variance matrices of (transformed) national incomes, the results are suggestive of important new markets that could actually be created, and show that there may be large welfare gains to creating some of these markets.
ER  -