Friday, September 2, 2011

Macro Markets and Risk Sharing (fg)

I highly recommend a set of readings of Bob Shiller on creating new market segments that allow to truely insure and hedge aggregate home country and global economic risk:
Shiller proposes a new set of markets that could in theory provide much better diversification opportunities. These so-called macro markets would be large international markets trading, in the form of futures contracts, long-term claims on major components of incomes shared by a large number of people or organizations. For example, in a macro market for the United States, an investor could buy a claim on the U.S. national income and then receive, for as long as the claim is held, dividends equal to a specified fraction of U.S. national income. Such a claim is comparable to a share in a corporation, except that the dividend would equal a share of national income rather than a share of corporate profits. Such markets might exist for entire countries— the United States, Japan, and Brazil—or for regions— such as the European Union and North America. Even a market for claims on the combined incomes of the entire world could be formed. Prices would rise and fall in these markets as new information about national, regional, or global economies became available, just as prices rise and fall in the stock market as new information
about corporate profits is revealed. The potential future importance of these markets is supported by the most basic principle of finance diversification. People could use macro markets to hedge their own national income risks and to invest in the rest of the world. This investment strategy would reduce income growth uncertainty and lead to a more secure financial future

Good to know Bob Shiller already has a patent on a specification on macro markets with nominal GDP securities ;) . The work on this subject includes
  • Bob Shiller (1993), Macro Markets. Creating Institutions for for Mangaing Society's Largest Economic Risk, Oxford.
  • Bob Shiller (2003), The New Financial Order. Risk in the 21th Century. Princeton.
  • Bob Shiller et al (1999), Macro Markets and Financial Security, FRBNY Economic Policy.
I also refer to the idea of Scott Sumner on using nominal GDP futures to extract market expectations on future nominal GDP as both information and target variable for monetary policy.