TY  - JOUR
AU  - Brandt,Michael W.
AU  - Cochrane,John H.
AU  - Santa-Clara,Pedro
TI  - International Risk Sharing is Better Than You Think (or Exchange Rates are Much Too Smooth)
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8404
PY  - 2001
Y2  - July 2001
UR  - http://www.nber.org/papers/w8404
L1  - http://www.nber.org/papers/w8404.pdf
N1  - Author contact info:
Michael W. Brandt
Fuqua School of Business
Duke University
One Towerview Drive
Durham, NC  27708
Tel: 919/660-1948
Fax: 919/660-8038
E-Mail: mbrandt@duke.edu

John H. Cochrane
Booth School of Business
University of Chicago
5807 S. Woodlawn
Chicago, IL  60637
Tel: 773/702-3059
Fax: 773/702-0458
E-Mail: john.cochrane@chicagobooth.edu

Pedro Santa-Clara
Faculdade de Economia
Universidade Nova de Lisboa
Rua Marques de Fronteira, 20
1099-038 LISBOA
PORTUGAL
Tel: +351-91-493-4313
E-Mail: psc@fe.unl.pt
AB  - Exchange rates depreciate by the difference between the domestic and foreign marginal utility growths. Exchange rates vary a lot , as much as 10% per year.  However, equity premia imply that marginal utility growths vary much more, by at least 50% per year.  This means that marginal utility growths must be highly correlated across countries -- international risk sharing is better than you think. Conversely, if risks really are not shared internationally, exchange rates should vary more than they do -- exchange rates are much too smooth. We calculate an index of international risk sharing that formalizes this intuition in the context of both complete and incomplete capital markets.  Our results suggest that risk sharing is indeed very high across several pairs of countries.
ER  -