Risk Sharing in International Economies and Market Incompleteness

American Finance Association Meeting 2016

27th Australasian Finance and Banking Conference 2014 Paper

Posted: 16 Aug 2014 Last revised: 30 Sep 2018

See all articles by Gurdip Bakshi

Gurdip Bakshi

Fox School of Business; Temple University - Fox School of Business and Management

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

John Crosby

University of Maryland - Robert H. Smith School of Business

Date Written: September 11, 2016

Abstract

We develop an incomplete markets framework to synthesize domestic and foreign stochastic discount factors (SDFs) that are consistent with limited international risk sharing. The fundamental departure in our paper is that exchange rate growth need not equal the ratio of SDFs, and we develop a restriction that precludes “good deals” in international economies with incomplete markets. Our innovation is to study an incomplete markets problem that is consistent with SDFs that (i) are nonnegative, (ii) correctly price returns, and (iii) disallow “good deals.”

Keywords: International risk sharing, incomplete markets, exchange rates, high (low) interest rates, carry trade

JEL Classification: G12, G13

Suggested Citation

Bakshi, Gurdip S. and Bakshi, Gurdip S. and Cerrato, Mario and Crosby, John, Risk Sharing in International Economies and Market Incompleteness (September 11, 2016). American Finance Association Meeting 2016 , 27th Australasian Finance and Banking Conference 2014 Paper, Available at SSRN: https://ssrn.com/abstract=2480679 or http://dx.doi.org/10.2139/ssrn.2480679

Gurdip S. Bakshi

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

John Crosby (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
+447979901892 (Phone)

HOME PAGE: http://www.john-crosby.co.uk/

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