Nominal revaluation of cross-border assets, terms-of-trade changes, international portfolio diversification, and international risk sharing

Using a simple theoretical model, I suggest that the nominal revaluation of cross-border assets (the international wealth redistribution through the changes in nominal variables) may work as an international risk-sharing mechanism at the aggregate level. Then, I empirically examine three risk-sharing channels: the nominal revaluation of cross-border assets, the terms-of-trade channel suggested by Cole and Obstfeld (1991), and cross-border security ownership (international portfolio diversification). Empirical results suggest that the nominal revaluation hedges country-specific consumption risks at the aggregate level but that the other two channels do not. The results have interesting implications on international risk-sharing and exchange rate regime comparison.