Updating the Evidence on Risk-Sharing through the Cross-Ownership of Assets in the Euro-Area

Abstract

Risk-sharing is a crucial issue in order to evaluate the performance of a monetary union. By implementing conventional econometric techniques, this paper intends to estimate the degree of risk-sharing through the cross-ownership of assets within 11 European countries in the period 1971–2014. We show that risk-sharing has been increasing after the launch of the euro due to increased cross-ownership of assets. Nevertheless, we also show that despite the extreme needs for adjustment mechanisms as a reaction to asymmetric shocks in the EMU during the crises, the estimated market risk-sharing mechanism seems to have remained marginal in this period. We also show that the degree of asymmetry (potential benefits from risk-sharing) has declined with the start of the EMU, but it has sharply increased during the crises period. This implies that EMU countries have needed good functioning risk-sharing mechanisms during the crisis, while in this period their estimated performance does not seem to have improved. We interpret these results as the evidence of a missing element of the EMU that forced governments to intervene by means of fiscal policy to tackle the imbalances deriving from the financial crisis. Therefore, we conclude that the weakness in the risk-sharing has been one of the channels that allowed the global financial crisis to mutate in a sovereign debt crisis in the EMU.

Citation

Foresti, P. and Napolitano, O. (2017), "Updating the Evidence on Risk-Sharing through the Cross-Ownership of Assets in the Euro-Area", Economic Imbalances and Institutional Changes to the Euro and the European Union (International Finance Review, Vol. 18), Emerald Publishing Limited, Leeds, pp. 161-172. https://doi.org/10.1108/S1569-376720170000018009