The long-run world consumption risk of international stock markets

A salient characteristic of recent developments in international financial markets is that the share of international assets in investors’ portfolios has increased. Taking the increase in international integration and consumption risk sharing among industrialized countries as given, this paper estimates the risk-aversion coefficient of a representative global investor who is concerned about the world consumption risk inherent in excess returns from different stock markets. The paper examines both traditional consumption risk and, as the novel aspect of the paper, long-run consumption risk, which is the exposure of excess returns to current-period plus future period changes in world consumption. This paper finds that the risk-aversion coefficient of the global investor can be brought down from an estimated value of around 100 in the traditional setting to less than 20 for the global investor who also takes long-run world consumption risk into account.