Abstract
I study international consumption risk sharing with limited stock market participation in each country. Novel micro-level household consumption data in the U.S. and U.K. show that the stockholders' cross-country consumption growth correlation is considerably higher than that of the aggregate consumption growth. I develop an incomplete market model that features this new empirical evidence by incorporating limited risk sharing due to limited stock market participation. Moreover, the model generates high international equity return correlation, low aggregate consumption growth correlation, and salient features of asset prices (high and volatile equity premium, low and smooth risk free rate). Financial integration significantly improves the stockholders' international consumption risk sharing, reduces their consumption volatility, and increases their welfare. However, the benefits are almost all captured by the stockholders.
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