Journal of Finance Vol. 76 No. 2 2021

Limited Risk Sharing and International Equity Returns

Shaojun Zhang^1,2,3,4,5,6

¹ Yangon University Of Distance Education · ² American Marketing Association · ³ Office National de l'Eau Potable · ⁴ Christ University · ⁵ The Ohio State University · ⁶ University of Hong Kong

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.

DOI

10.1111/jofi.12994

Volume

76

Issue

2

Pages

893-933

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓