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Consumption smoothing, risk sharing and financial integration
Author(s) -
Donadelli Michael,
Gufler Ivan
Publication year - 2021
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12996
Subject(s) - consumption smoothing , economics , smoothing , financial integration , volatility (finance) , equity (law) , consumption (sociology) , econometrics , financial market , financial economics , finance , macroeconomics , computer science , business cycle , social science , sociology , political science , law , computer vision
Abstract Theories indicate that financial integration should allow economies to better share risk and thus improve consumption smoothing. We construct two widely used price‐based measures of financial integration (i.e., the standard correlation and the adjusted R ‐squared) and test whether consumption volatility declines as international equity markets become more integrated. Pooled and panel estimates for three different groups of countries (i.e., G7, G20 and EU) provide no significant evidence of improved consumption smoothing as financial integration rises. This evidence is supported by a battery of robustness checks and holds over time. Taken together, our results suggest that convergence in international equity prices does not necessarily represent the channel through which risk‐sharing opportunities arise or consumption smoothing improves.