International Risk Sharing: Through Equity Diversification or Exchange Rate Hedging?

This article argues that the international financial consequences of immigration exert a substantial influence on the choice of exchange rate regimes in the developing world. Over the past two decades, migrant remittances have emerged as a significant source of external finance for developing countries, often exceeding conventional sources of capital such as foreign direct investment and bank lending. Remittances are unlike nearly all other capital flows in that they are stable and move countercyclically relative to the recipient country's economy. As a result, they mitigate the costs of forgone domestic monetary policy autonomy and also serve as an international risk-sharing mechanism for developing countries. The observable implication of these arguments is that remittances increase the likelihood that policy makers adopt fixed exchange rates. An analysis of data onde factoexchange rate regimes and a newly available data set on remittances for up to 74 developing countries from 1982 to 2006 provides strong support for these arguments. The results are robust to instrumental variable analysis and the inclusion of multiple economic and political variables.

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International Risk Sharing and the Choice of Exchange-Rate Regime

10.3386/w0842 ◽

1982 ◽

Author(s):

David Hsieh

Keyword(s):

Exchange Rate ◽

Risk Sharing ◽

Exchange Rate Regime ◽

International Risk Sharing

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International Risk-Sharing and the Exchange Rate: Re-Evaluating the Case for Flexible Exchange Rates

SSRN Electronic Journal ◽

10.2139/ssrn.1009384 ◽

2001 ◽

Cited By ~ 3

Author(s):

Michael B. Devereux

Keyword(s):

Exchange Rate ◽

Exchange Rates ◽

Risk Sharing ◽

International Risk Sharing ◽

The Exchange Rate ◽

Flexible Exchange Rates

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The Relation between National Stock Prices and Effective Exchange Rates: Does It Affect Exchange Rate Exposure?

Global Economy Journal ◽

10.1515/gej-2014-0057 ◽

2015 ◽

Vol 15 (2) ◽

pp. 241-256 ◽

Cited By ~ 1

Author(s):

Marko Korhonen

Keyword(s):

Exchange Rate ◽

Stock Market ◽

Exchange Rates ◽

Stock Prices ◽

Risk Sharing ◽

International Risk Sharing ◽

Exchange Rate Exposure ◽

Effective Exchange ◽

The Exchange Rate ◽

Cointegration Relationship

There is twofold contribution in this paper. First, by using monthly data for 16 industrialized countries for the period 1973–2011 we find evidence of time-varying cointegration relationship between effective exchange rates and national stock market indices. Second, we present that the cointegration relationship affects exchange rate exposure. We propose that the exchange rate exposure effect changes when the connection between the exchange rate and stock market emerges. This is a new result and reflects importance of these markets’ joint role in international risk sharing.

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