Uninsurable Risk and Financial Market Puzzles

Basu, P.; Semenov, A.; Wada, K.

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.

Citation

Basu, P., Semenov, A., & Wada, K. (2011). Uninsurable Risk and Financial Market Puzzles. Journal of International Money and Finance, 30(6), 1055-1089. https://doi.org/10.1016/j.jimonfin.2011.05.012

• Journal Article Type: Article
• Publication Date: Oct 1, 2011
• Deposit Date: May 17, 2011
• Journal: Journal of International Money and Finance
• Print ISSN: 0261-5606
• Electronic ISSN: 1873-0639
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 30
• Issue: 6
• Pages: 1055-1089
• DOI: https://doi.org/10.1016/j.jimonfin.2011.05.012
• Keywords: Currency premium, Equity premium, Exchange rate.
• Public URL: https://durham-repository.worktribe.com/output/1509780