Financial Markets and International Risk Sharing*
Martin Schmitz^
Department of Economics and IIIS,
Trinity College Dublin
November 2007
Abstract
Panel analysis of 20 industrial countries shows evidence for pro-cyclicality of
capital gains on domestic stock markets - in particular over a medium term horizon.
Thus, with cross-border ownership of portfolio equity investments, potential for
international smoothing of domestic output fluctuations by means of the capital
gains channel is found. Individual country analysis reveals substantial heterogeneity
of cyclicality patterns. Evidence suggests that this cross-country variation can be
explained by the level of economic development and the size of financial markets.
Keywords: International risk sharing, capital gains, cross-border investment
JEL Classification: F21, F30, G15
*The author is grateful to Philip Lane for his encouragement and very helpful comments.
^Trinity College Dublin, Department of Economics and Institute for International Integration Studies,
College Green, Dublin 2, Ireland. E-mail: [email protected].
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