Classical contributions in international macroeconomics reconcile low international risk sharing by generating a non-traded component to exchange rates. However, when there is cross-border trade in just one domestic and one foreign-currency-denominated risk-free asset, such price movements are ruled out by no-arbitrage restrictions. Allowing for within-country heterogeneity in stochastic discount factors, we recover low risk-sharing even with cross-border trade in two risk-free assets, as long as heterogeneity increases when exchange rates depreciate.
Suggested citation:
Marin, Emile A., and Sanjay R. Singh. 2024. “Low Risk Sharing with Many Assets.” Federal Reserve Bank of San Francisco Working Paper 2023-37. https://doi.org/10.24148/wp2023-37