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American Economic Review: Vol. 91 No. 4 (September 2001)

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World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

Article Citation

Athanasoulis, Stefano G., and Robert J. Shiller. 2001. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities." American Economic Review, 91(4): 1031-1054.

DOI: 10.1257/aer.91.4.1031

Abstract

A method is constructed for decomposing the variance of changes in incomes in the world into components, to indicate the most important risk-sharing opportunities among people of the world. A constant absolute risk premium (CARP) model, an intertemporal general-equilibrium model of the world, is presented to permit optimal contract design. For a contract designer maximizing a social welfare function, the optimal contracts maximize the equilibrium world real interest rate. Securities are defined in terms of eigenvectors of a transformed variance matrix. The method is applied using Penn World Table data on the G-7 countries, 1950-92.

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Authors

Athanasoulis, Stefano G. (U Notre Dame)
Shiller, Robert J. (Yale U)

JEL Classifications

F40: Macroeconomic Aspects of International Trade and Finance: General
G15: International Financial Markets


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