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Limited Risk Sharing and International Equity Returns

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  • SHAOJUN ZHANG

Abstract

Limited stock market participation can potentially explain the disconnect between international asset prices and macro quantities. An incomplete markets model in which risk sharing for stockholders is high generates highly correlated equity returns and relatively smooth exchange rates. Risk sharing for nonstockholders is limited because of their nonparticipation in stock markets and borrowing constraints, reducing the aggregate consumption correlation and the correlation between aggregate consumption differentials and exchange rates. Financial integration widens the disconnect by benefiting stockholders but hurting nonstockholders. Survey data indicate that international risk sharing for stockholders is better than that for nonstockholders, consistent with the predictions.

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  • Shaojun Zhang, 2021. "Limited Risk Sharing and International Equity Returns," Journal of Finance, American Finance Association, vol. 76(2), pages 893-933, April.
    • Handle: RePEc:bla:jfinan:v:76:y:2021:i:2:p:893-933
    DOI: 10.1111/jofi.12994
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    Cited by:

    1. Chien, YiLi & Lustig, Hanno & Naknoi, Kanda, 2020. "Why are exchange rates so smooth? A household finance explanation," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 129-144.
    2. Curatola, Giuliano & Dergunov, Ilya, 2023. "International capital markets with interdependent preferences: Theory and empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 403-421.

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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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