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Title: International Risk Sharing with Market Segmentation
Authors: Fesselmeyer, Eric
Mirman, Leonard J.
Santugini, Marc
Keywords: International Financial Markets
Market Segmentation
Risk Sharing
Risky Project
Issue Date: 2012-09
Series/Report no.: Cahiers du CIRPÉE;12-36
Abstract: We study the effect of market segmentation on international risk sharing. In our model, entrepreneurs consider undertaking risky projects in the real sector as well as selling part of their projects to investors. To capture the idea of market segmentation (i.e., agents from different countries have different opportunity costs of participating in the risky projects), the returns on the alternative risk-free investment are allowed to differ between the entrepreneurs and the investors. We first show that market segmentation establishes links between the risk-free and risky sectors as well as between the real and financial sectors. In particular, if there is market segmentation, then the amount of risk sharing depends on the risk-free rates and the expected return of the risky project. Moreover, the level of real investment also depends on the risk-free rates. Second, we show how different risk-free rates may encourage or discourage risk sharing, and even prevent risk sharing altogether.
Appears in Collections:Cahiers de recherche du CIRPÉE

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