International Risk Sharing and Gains from Financial Globalization

Table of contents

Table of figures ... II

Abstract ... III

1. Introduction ... 1

2. Fundamental theory and theoretical predictions ... 1
a. Relevance of risk sharing ... 1
b. Gains of diversification ... 2
c. Home Bias Puzzle ... 3

3. Empirical investigations of risk sharing in emerging markets ... 3
a. Consumption risk sharing ... 3
b. Impact of financial integration ... 6
c. Impact of default risk ... 7
d. Policy interventions and capital flows ... 8
e. Risk sharing and defaults in different subgroups ... 9
f. Relations between idiosyncratic output fluctuations and financial market developments ... 11

4. Lacks of international risk sharing ... 13
a. Why is there so little risk sharing in emerging markets? ... 13
b. Sensitivity of international risk sharing for financial integration under sovereign default risk ... 14
c. Country heterogeneity in cyclicality patterns ... 15

5. Conclusion ... 16

References ... IV

Appendix ... VI

Cyclicality of capital gains on domestic stock market ... XII

Abstract

In light of ongoing financial integration and economic development, we investigate the influence of international risk sharing in terms of financial globalization for emerging markets. We see just little evidence of risk sharing in the last decades, but still come up with some persuasive inquiries to consider. Improvements in international risk sharing potentially lead to stabilizing effects, scarcer sudden stops and smaller risk premiums. Structural policy changes and better financial integration could surmount the threshold effect.

Feel free to use the following mind map as a compass to rank the factual connection right.

1. Introduction

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Figure 1 Mind map to rank the factual connection

Is international risk sharing able to smooth uncertainties in the emerging markets? Will they catch up the distance to industrial countries? In this paper, we will investigate the potential of international risk sharing for emerging markets, particularly in terms of financial integration and liberalization.

Several government leaders all over the world recognize the potential of financial globalization for their country. If we take (Ibrahim, Dangote, & Kaberuka, 2017) as a highly topical example, we observe a strong incentive for deeper financial linking. Three of the development countries in Africa, already grew up to the so‑called emerging markets: Egypt, Morocco and South Africa. To keep up with the fast growing population and facilitating the economic growth, they want to stimulate employments for agriculture and infrastructure by investment partnerships with the G20. Whereas Donald Trump, the President of the USA, would like to cut funding World Bank programs like credit guarantees or small business access to finance for these countries. Indeed, these development countries, also including emerging markets, need to implement more structural changes like liberalizing financial markets and financial transparency for these intentions.

In this paper, we will survey if these incentives of financial integration, in terms of international risk sharing, indicate benefits for emerging market economies. In addition, we will investigate if huge foreign capital inflows show positive effects of risk sharing for them.

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