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On the gains to international trade in risky financial assets

Author: Steven J Davis; Jeremy Nalewaik; Paul Willen; National Bureau of Economic Research.
Publisher: Cambridge, MA : National Bureau of Economic Research, ©2000.
Series: Working paper series (National Bureau of Economic Research), working paper no. 7796.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
Abstract: This paper develops and implements a framework for quantifying the gains to international trade in risky financial assets. The framework can handle may agents, many assets, incomplete markets and limited participation in asset markets. It delivers closed-form analytic solutions for consumption, portfolio allocations, asset prices and the gains to trade. We find enormous gains to trade when asset returns  Read more...
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Additional Physical Format: Print version:
Davis, Steven J.
On the gains to international trade in risky financial assets.
Cambridge, MA : National Bureau of Economic Research, ©2000
(OCoLC)44739940
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Steven J Davis; Jeremy Nalewaik; Paul Willen; National Bureau of Economic Research.
OCLC Number: 646960084
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2010. MiAaHDL
Description: 1 online resource (61 pages) : illustrations.
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 7796.
Responsibility: Steven J. Davis, Jeremy Nalewaik, Paul Willen.

Abstract:

Abstract: This paper develops and implements a framework for quantifying the gains to international trade in risky financial assets. The framework can handle may agents, many assets, incomplete markets and limited participation in asset markets. It delivers closed-form analytic solutions for consumption, portfolio allocations, asset prices and the gains to trade. We find enormous gains to trade when asset returns are calibrated to observed risk premia and all agents participate in asset markets. The gains-to-trade puzzle is closely related to, but distinct from, the equity premium puzzle. High risk aversion merely alters the form of the gains-to-trade puzzle, but limited participation in asset markets goes a long way towards addressing both puzzles. We also identify three reasons for limited international risk sharing. First, the requirement that asset markets span the space of national output shocks fails in a serious way. Second, for many countries the cost of using financial assets to hedge national output shocks greatly exceeds the benefits. Third, limited asset market participation reduces the feasible gains from international risk sharing.

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