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Uninsurable Risk and Financial Market Puzzles

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  • Parantap Basu
  • Andrei Semenovz
  • Kenji Wadax

Abstract

This paper develops an integrated model, which addresses the recent Brandt, Cochrane and Santa-Clara (2006) puzzle of reconciling low international risk sharing with a high and variable equity premium. In addition, a new currency risk premium puzzle is also addressed. Following Kocherlakota and Pistaferri (2007), we examine two market structures: (i) where private risk cannot be insured and (ii) where the private risk can be partially insured by striking long term insurance contract with truth revelation constraint. Our GMM estimation based on the US-UK .nancial and cross-sectional household spending data lends support to the second market environment.

Suggested Citation

  • Parantap Basu & Andrei Semenovz & Kenji Wadax, 2007. "Uninsurable Risk and Financial Market Puzzles," CDMA Conference Paper Series 0701, Centre for Dynamic Macroeconomic Analysis.
    • Handle: RePEc:san:cdmacp:0701
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    References listed on IDEAS

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    Cited by:

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    2. Parantap Basu & Sigit Sulistiyo Wibowo, 2015. "An Empirical Investigation of Risk Sharing among Indonesian Households," CEMAP Working Papers 2015_02, Durham University Business School.
    3. Elie Appelbaum & Parantap Basu, 2010. "A new methodology for studying the equity premium," Annals of Operations Research, Springer, vol. 176(1), pages 109-126, April.

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G00 - Financial Economics - - General - - - General

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