Document Type
Discussion Paper
Publication Date
5-1-1995
CFDP Number
1097
CFDP Revision Date
1997-06-01
CFDP Pages
32
Abstract
We provide a method for decomposing the variance of world national income (present values) into components in such a way as to indicate the most important risk-sharing opportunities among nations of the world. We identify risk-sharing opportunities in terms of eigenvectors of a variance matrix of deviations of the present value of country incomes from their respective shares (adjusted for population and risk aversion) of world income. The method is applied to data on national incomes of six large countries 1870-1992 (Maddison [1995]): Canada, France, Germany, Italy, United Kingdom and United States. The method reveals that, assuming symmetric risk aversions, the most important risk sharing contract to devise for these countries would be essentially a national income swap between the United States, and together on the other side, France, Germany and Italy, i.e., approximately a US-Europe national income swap. A contract that is essentially a France-Germany swap is the second most important risk-sharing contract.
Recommended Citation
Shiller, Robert J. and Athanasoulis, Stefano G., "World Income Components: Measuring and Exploiting International Risk Sharing Opportunities" (1995). Cowles Foundation Discussion Papers. 1340.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1340