Capital Market Integration and Consumption Risk Sharing over the Long Run

Jesper Rangvid; Pedro Santa-Clara; Maik Schmeling

Capital Market Integration and Consumption Risk Sharing over the Long Run

Jesper Rangvid, Pedro Santa-Clara, Maik Schmeling

Department of Finance

Research output: Contribution to conference › Paper › Research › peer-review

Abstract

We empirically investigate time variation in capital market integration and consumption risk sharing using data for 16 countries from 1875 to 2012. We show that there has been considerable variation over time in the degrees of capital market integration and consumption risk sharing and that higher capital market integration forecasts more consumption risk sharing in the future. This finding is robust is to controlling for trade openness and exchange rate volatilities. Hence, financial integration seems to drive consumption risk sharing whereas we find no evidence that risk sharing forecasts market integration. We also calculate the welfare costs of imperfect capital market
integration and risk sharing and find that these costs vary a lot over time. Finally, we show that consumption risk sharing is higher during times of crises, i.e. at times when marginal utility is high and risk sharing is most valuable.

Original language	English
Publication date	30 Jun 2014
Number of pages	49
Publication status	Published - 30 Jun 2014
Event	The 41th European Finance Association Annual Meeting (EFA 2014) - Palazzo dei Congressi, Lugano, Switzerland Duration: 27 Aug 2014 → 30 Aug 2014 Conference number: 41 http://www.efa2014.org/

Conference

Conference	The 41th European Finance Association Annual Meeting (EFA 2014)
Number	41
Location	Palazzo dei Congressi
Country	Switzerland
City	Lugano
Period	27/08/2014 → 30/08/2014
Internet address	http://www.efa2014.org/

Access to Document

https://www.conftool.com/efa2014/index.php/EFA_2014-257-Rangvid-Capital_Market_Integration_and_Consumption_Risk_Sharing_over_the_Long_Run.pdf?page=downloadPaper&filename=EFA_2014-257-Rangvid-Capital_Market_Integration_and_Consumption_Risk_Sharing_over_the_Long_Run.pdf&form_id=257&form_version=final

Cite this

Rangvid, J., Santa-Clara, P., & Schmeling, M. (2014). Capital Market Integration and Consumption Risk Sharing over the Long Run. Paper presented at The 41th European Finance Association Annual Meeting (EFA 2014), Lugano, Switzerland. https://www.conftool.com/efa2014/index.php/EFA_2014-257-Rangvid-Capital_Market_Integration_and_Consumption_Risk_Sharing_over_the_Long_Run.pdf?page=downloadPaper&filename=EFA_2014-257-Rangvid-Capital_Market_Integration_and_Consumption_Risk_Sharing_over_the_Long_Run.pdf&form_id=257&form_version=final

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Rangvid, J, Santa-Clara, P & Schmeling, M 2014, 'Capital Market Integration and Consumption Risk Sharing over the Long Run', Paper presented at The 41th European Finance Association Annual Meeting (EFA 2014), Lugano, Switzerland, 27/08/2014 - 30/08/2014. <https://www.conftool.com/efa2014/index.php/EFA_2014-257-Rangvid-Capital_Market_Integration_and_Consumption_Risk_Sharing_over_the_Long_Run.pdf?page=downloadPaper&filename=EFA_2014-257-Rangvid-Capital_Market_Integration_and_Consumption_Risk_Sharing_over_the_Long_Run.pdf&form_id=257&form_version=final>

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AB - We empirically investigate time variation in capital market integration and consumption risk sharing using data for 16 countries from 1875 to 2012. We show that there has been considerable variation over time in the degrees of capital market integration and consumption risk sharing and that higher capital market integration forecasts more consumption risk sharing in the future. This finding is robust is to controlling for trade openness and exchange rate volatilities. Hence, financial integration seems to drive consumption risk sharing whereas we find no evidence that risk sharing forecasts market integration. We also calculate the welfare costs of imperfect capital marketintegration and risk sharing and find that these costs vary a lot over time. Finally, we show that consumption risk sharing is higher during times of crises, i.e. at times when marginal utility is high and risk sharing is most valuable.

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