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Financial Integration with Heterogeneous Beliefs

Rieger, Jörg

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In this paper we study the effects of financial integration on risk-sharing. Conventional macroeconomic theory suggests that the integration of financial markets improves welfare. In contrast to the literature we assume that households have heterogeneous beliefs. Because of the differences in beliefs, households are not only sharing the risk but also speculating. We show that with speculation, financial integration can increase the risk in the economy and that a full financial integration is not always beneficial. We also have a numerical example for a small set of countries and show that the losses due to heterogeneous beliefs are small.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0568
Place of Publication: Heidelberg
Date Deposited: 18 Jun 2014 11:51
Date: June 2014
Number of Pages: 26
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: Heterogeneous Beliefs, Financial Integration, Incomplete Markets
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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