March 24, 1999


The article Macro Markets and Financial Security, which appears in the latest edition of the New York Fed’s Economic Policy Review, is available for your review.

In the article, authors Stefano Athanasoulis, Robert Shiller, and Eric van Wincoop look at a controversial new set of markets--called "macro markets" --recently proposed by researchers. These markets would give investors an opportunity to trade long-term claims on the income of an entire country or region. By holding offsetting positions in domestic and foreign markets, investors could use macro markets to reduce exposure to country-specific income uncertainty.

To estimate the risk that macro markets could potentially manage, the authors calculate the size of the country-specific risk component of per capita GDP for a sample of forty-nine countries. The results reveal that country-specific risk can be significant: after controlling for expected growth, the authors find that over a period of thirty-five years the per capita GDP of the best performing country is likely to increase by a factor of five, relative to that of the worst-performing country.

Although macro markets could potentially eliminate much risk and create investment opportunities, the authors assert that many barriers stand in the way of macro market development, including investors’ focus on short-term portfolio performance, sizable startup costs, and contract enforcement difficulties.

If these barriers are surmounted, however, portfolio managers could find themselves routinely hedging national income risks, according to the authors. Many factors essential to the start of macro markets, such as well-functioning financial exchanges, a sophisticated technology of trading, and the intellectual appreciation of the importance of risk management, are already in place in many countries, the authors note.

Stefano Athanasoulis is a visiting assistant professor and Robert Shiller a professor of economics at Yale University. Eric van Wincoop is a senior economist at the New York Fed.

Contact: Douglas Tillett

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