Risk Sharing

Abstract

The amount of risk sharing among countries is theoretically affected by trade policy, market openness, and monetary policy. To what extent each of these characteristics affect risk sharing is the object of this study. I use a risk sharing index akin to a correlation coefficient and compare it with the correlation between the returns on several market indexes, and with the correlation between changes in consumption. I find that the financial integration of markets does not necessarily imply risk sharing or co movements in consumption. The results also suggest that two countries being aligned in monetary policy do not ensure risk sharing.