Explaining the Lack of International Risk-Sharing

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Karen Lewis University of Pennsylvania SBR-9510879 This proposal will explore an important puzzle in international finance, namely why domestic residents do not diversify sufficiently into foreign assets to optimally risk-share. The proposal consists of three projects. The first project examines consumption comovements and will test for whether they can be accounted for by non-separabilities in the utility function. The second project will test whether there are market restrictions on international risk-sharing by re-examining the consumption comovements allowing for market restrictions (e.g., foreign exchange restrictions, defaults or interest arrears on international loans). The third project will attempt to measure the welfare loss from incomplete international risk-sharing using data on consumption, equity returns, and capital market restrictions. The project will result in two new data sets: panel data on consumption disaggregated by durable/non-durable and tradable/non-tradable and panel data on various measures of capital market restrictions.