Essays in international risk-sharing and asymmetric information

This thesis consists of a collection of three essays whose prevailing themes are issues of risk-sharing and asymmetric information.;In Chapter 2, a two country noisy rational expectations economy with endogenous, costly, country-specific information acquisition is constructed. Within this context, the phenomena of home bias in equity investment as well as the higher transaction rates of the domestic agents' foreign asset holdings arise optimally. Informational heterogeneity is the driving force behind both of these empirically recorded phenomena. The model is calibrated and the magnitudes of the variables of interest is compared to their empirical counterparts. It is demonstrated that asymmetry in information can explain approximately 40% of the observed home bias. The model can also generate a maximum foreign to domestic equity turnover rate ratio equal to 1.625. It is also shown that improvements in information quality and decreases in the correlation coefficient of the asset returns can intensify the phenomenon of non-diversification.;The purpose of Chapter 3 is to identify between the information and noisy contents of stock trading volume and to measure the impact of these two components on asset prices. The econometric procedure applied is a structural VAR in standing quotes, transaction prices and trades. Three structural shocks are captured: private information, noise and public trade-unrelated information. The main identifying assumption is that noise has no long-run effects on asset demands. Based mainly on this restriction the contributions of the above-mentioned shocks to quote and asset demand variability can be measured. It is found that, given the employed identification scheme, around 60% of the long-run quote variability is caused by private information arrivals. The contributions of noise trading and public non-trade information are 14% and 26% respectively. The contribution of noise trading on quotes is substantial given the fact that only a small portion of trading volume variability (1.6%) is explained by irrational trading.;Chapter 4 tests the implications of the complete markets International Real Business Cycle (IRBC) model for the group of the G7 countries' consumption series for the period 1960-1994. More specifically this paper tests for the existence of risk-sharing arrangements by implementing the Johansen's Maximum Likelihood method for detection of cointegration. Its focus lies in detecting increases in the degree of international consumption risk-sharing through time and on the contribution of real exchange rate movements in the attainment of risk-sharing. The main findings of this paper can be summarized as follows: The strict implications of the complete market IRBC model are rejected but the present investigation does find clear evidence of increased international economic integration for the recent years. It is also found that when real exchange rates are incorporated the evidence in favor of consumption risk-sharing becomes considerably stronger, especially for the post Bretton-Woods era. It is also shown that a consequence of this risk-sharing mechanism is that real exchange rates form strong equilibrium relationships with the corresponding consumption series to which they tend to revert in the long-run.