TY  - JOUR
AU  - Lewis,Karen K.
TI  - Consumption, Stock Returns, and the Gains from International Risk-Sharing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5410
PY  - 1996
Y2  - January 1996
UR  - http://www.nber.org/papers/w5410
L1  - http://www.nber.org/papers/w5410.pdf
N1  - Author contact info:
Karen K. Lewis
Department of Finance, Wharton School
2300 SHDH
University of Pennsylvania
Philadelphia, PA 19104-6367
Tel: 215/898-7637
Fax: 215/898-6200
E-Mail: lewisk@wharton.upenn.edu
AB  - Standard theoretical models predict that domestic residents should diversify their portfolios into foreign assets much more than observed in practice.  Whether this lack of diversification is important depends upon the potential gains from risk-sharing.  General equilibrium models and consumption data tend to find that the costs are small, typically less than «% of permanent consumption.  On the other hand, stock returns imply gains that are several hundred times larger.  In this paper, I examine the reasons for these differences. I find that the primary differences are due to either: (a) the much higher variability of stocks, and/or (b) the higher degree of risk aversion required to reconcile an international equity premium.  On the other hand, the significant differences do not arise treating stock returns as exogenous.
ER  -