Channels of International Risk-Sharing: Capital Gains versus Income Flows

45 Pages Posted: 5 Nov 2008

See all articles by Thierry Bracke

Thierry Bracke

European Central Bank (ECB)

Martin Schmitz

European Central Bank (ECB)

Date Written: September 30, 2008

Abstract

Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative) when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening.

Keywords: International risk sharing, International portfolio diversification, Consumption smoothing, Cross-border investment, Valuation effects

JEL Classification: F21, F30, F36

Suggested Citation

Bracke, Thierry and Schmitz, Martin, Channels of International Risk-Sharing: Capital Gains versus Income Flows (September 30, 2008). ECB Working Paper No. 938, Available at SSRN: https://ssrn.com/abstract=1265461 or http://dx.doi.org/10.2139/ssrn.1265461

Thierry Bracke (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Martin Schmitz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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