Macroeconomic risk and international financial markets

Abstract

This thesis is composed of three essays addressing the use of financial markets to hedge or gain exposure to macroeconomic risk. The first essay examines the question of consumption risk sharing between countries. Theory predicts that greater international financial integration should allow a higher degree of idiosyncratic consumption risk to be shared, so that domestic consumption in any given country should respond more to aggregate output shocks and less to domestic shocks. This prediction has never held true in an empirical study of developing or emerging countries, and the first essay of the thesis presents a number of reasons why this may be so.