What Do International Asset Returns Imply About Consumption Risk-Sharing?∗ (Preliminary and Incomplete)

An extensive literature has examined the potential risk-sharing gains from international diversification by focusing on models and data based upon consumption relationships across countries. These consumption-based studies have largely ignored the implications of the models for asset pricing moments, leading to counterfactual asset pricing relationships such as low equity premia, high risk free rates, and low volatility of asset returns. These counterfactual predictions in asset returns cast doubt on the ability of the literature to accurately measure gains from risksharing. In this paper, we begin to bridge this disconnect in the literature. We first show how the use of key preference parameters affect both asset return moments and risk-sharing measures. We then use asset return moments to discipline our parameter estimates. Based upon these estimates, we re-examine the gains from international consumption risk-sharing. ∗We thank seminar participants at the Wharton School and the Philadelphia Federal Reserve for valuable comments. †University of Pennsylvania The Wharton School and NBER. E-mail: [email protected] ‡University of Pennsylvania The Wharton School. E-mail: [email protected]