Is Increasing Financial Integration Related to Improved International Risk Sharing?

Abstract

In order to answer the question whether more integrated financial markets are characterized by less international risk sharing we focus on the long-term evolutions of the intensively discussed anomalies of the equity home bias, used as indicator for financial integration, and the international risk sharing in consumption. Using panel-data regressions for 21 OECD countries from 1980 to 2010, we show that a less than average amount of equity home bias, e.g. higher than average amount of international income flows, is associated with more international risk sharing. Much of the increase in international asset positions came during the recent globalization period. More generally, by measuring financial integration by the index of the equity home bias, our results indicate that more financial integration goes hand-in-hand with more internationally shared risk. Our results are robust across countries and time.