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Risk sharing from international factor income: explaining cross-country differences

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Abstract:

Access to world capital markets and net investment income flows between countries help protect national income from country-specific output shocks. I empirically study what factors explain cross-country differences in the extent of risk sharing from international factor income. An index of investor protection is the leading causal variable for the estimated amount of risk sharing over the 1985 to 2004 period. Improving investor protection in Russia to Denmark's level implies five times larger risk sharing compared to the sample average. These results indicate one possible way to reap large potential benefits from international risk sharing.

Keywords: F36; G15; O17; diversification; international financial integration; investor protection; risk sharing

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2011.617703

Affiliations: Erasmus University Rotterdam, Tinbergen Institute and ERIM,Burg. Oudlaan 50, Room H14-30, 3062 PA Rotterdam, The Netherlands

Publication date: April 1, 2013

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