NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Gains to International Trade in Risky Financial Assets

Steven J. Davis, Jeremy Nalewaik, Paul Willen

NBER Working Paper No. 7796
Issued in July 2000
NBER Program(s):   AP   EFG   IFM

This paper develops and implements a framework for quantifying the gains to international trade in risky financial assets. The framework can handle may agents, many assets, incomplete markets and limited participation in asset markets. It delivers closed-form analytic solutions for consumption, portfolio allocations, asset prices and the gains to trade. We find enormous gains to trade when asset returns are calibrated to observed risk premia and all agents participate in asset markets. The gains-to-trade puzzle is closely related to, but distinct from, the equity premium puzzle. High risk aversion merely alters the form of the gains-to-trade puzzle, but limited participation in asset markets goes a long way towards addressing both puzzles. We also identify three reasons for limited international risk sharing. First, the requirement that asset markets span the space of national output shocks fails in a serious way. Second, for many countries the cost of using financial assets to hedge national output shocks greatly exceeds the benefits. Third, limited asset market participation reduces the feasible gains from international risk sharing.

download in pdf format
   (564 K)

email paper

This paper is available as PDF (564 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Users who downloaded this paper also downloaded these:
Caballero and Krishnamurthy w8427 Smoothing Sudden Stops
Froot w8110 The Market for Catastrophe Risk: A Clinical Examination
Lamoreaux and Sokoloff w7107 Inventive Activity and the Market for Technology in the United States, 1840-1920
Lane and Shambaugh w14909 The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets
Shleifer and Vishny w5167 The Limits of Arbitrage
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us