What Macroeconomic Risks Are (Not) Shared by International Investors?

Adopting an asset-market view of international risk sharing, we identify various sources of macroeconomic risk faced by international investors using a structural Vector Autoregression model. We find that most of the risks of exogenous financial market shocks are shared by international investors through the existing asset markets. However, other macroeconomic risks such as those associated with exogenous shocks to consumption growth, inflation and monetary policies are not fully shared across countries. This finding helps us understand the apparently contradicting perceptions of international risk sharing generated by the analysis of asset-market returns versus that of aggregate consumption growth across countries.