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Risk Aversion and International Markets: Does Asset Trade Smooth Real Income?

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  • Feeney, JoAnne
  • Jones, Ronald W

Abstract

In a two-country model, complete asset markets do not guarantee that individuals will choose to eliminate all (diversifiable) risk in aggregate consumption. The presence of nontraded goods forces individuals to choose between reducing uncertainty in aggregate consumption and in the composition between traded and nontraded goods. This choice depends on a comparison of the standard coefficient of relative risk aversion with a second type of risk aversion that becomes relevant when nontraded goods are present, one that captures aversion to risk in composition. Regardless of the decision made, asset trade always reduces the risk premium. Copyright 1994 by Blackwell Publishing Ltd.

Suggested Citation

  • Feeney, JoAnne & Jones, Ronald W, 1994. "Risk Aversion and International Markets: Does Asset Trade Smooth Real Income?," Review of International Economics, Wiley Blackwell, vol. 2(1), pages 13-26, February.
    • Handle: RePEc:bla:reviec:v:2:y:1994:i:1:p:13-26
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    Cited by:

    1. Maurice Obstfeld, 1993. "International Capital Mobility in the 1990s," NBER Working Papers 4534, National Bureau of Economic Research, Inc.
    2. Pakko, Michael R, 1997. "International Risk Sharing and Low Cross-Country Consumption Correlations: Are They Really Inconsistent?," Review of International Economics, Wiley Blackwell, vol. 5(3), pages 386-400, August.
    3. Michael R. Pakko, 1997. "Trade, investment, and international borrowing in two-country business cycle models," Working Papers 1997-023, Federal Reserve Bank of St. Louis.
    4. Michael J. Dueker, 1995. "Tariffs and asset market structure: some basic comparative dynamics," Working Papers 1995-009, Federal Reserve Bank of St. Louis.

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