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Uninsurable Risk and Financial Market Puzzles

Basu, P.; Semenov, A.; Wada, K.

Authors

A. Semenov

K. Wada



Abstract

This paper develops an integrated model, which addresses the recent Brandt, Cochrane and Santa-Clara (2006) puzzle of reconciling low international risk sharing with a high and variable equity premium. In addition, a new currency risk premium puzzle is also addressed. Following Kocherlakota and Pistaferri (2007), we examine two market structures: (i) where private risk cannot be insured and (ii) where the private risk can be partially insured by striking long term insurance contract with truth revelation constraint. Our GMM estimation based on the US-UK .nancial and cross-sectional household spending data lends support to the second market environment.

Citation

Basu, P., Semenov, A., & Wada, K. (2011). Uninsurable Risk and Financial Market Puzzles. Journal of International Money and Finance, 30(6), 1055-1089. https://doi.org/10.1016/j.jimonfin.2011.05.012

Journal Article Type Article
Publication Date Oct 1, 2011
Deposit Date May 17, 2011
Journal Journal of International Money and Finance
Print ISSN 0261-5606
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 30
Issue 6
Pages 1055-1089
DOI https://doi.org/10.1016/j.jimonfin.2011.05.012
Keywords Currency premium, Equity premium, Exchange rate.
Public URL https://durham-repository.worktribe.com/output/1509780

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