Abstract
We examine an unexplored connection between economic sentiments and the degree of international risk sharing. As sentiments provide a sense of the expected direction of future income changes, if risk sharing is imperfect, countries experiencing weak sentiments should take actions to enable the smoothing of their consumption in the event this fall in income materialises. However, we find the opposite holds: weak sentiments are associated with reduced risk sharing. This finding is robust to the inclusion of alternative determinants of international risk sharing, the state of the business cycle as well as undiversifiable and persistent output fluctuations. We provide evidence that our results are consistent with loss aversion. Our findings have important implications for private initiatives and public institutions that aim to improve international risk sharing, which are usually designed on the basis of risk-averse or risk-neutral behaviour.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
