Foreign portfolio diversification and risk-sharing

We investigate income smoothing associated with international portfolio diversification by decomposing the net factor income (NFI) channel into interests, dividends and retained earnings, for OECD and EU countries. We find that interest receipts and equity dividend payments contribute significantly to absorb domestic income shocks. Geographically concentrated portfolios and, in particular, biases toward EU markets have a strong negative effect on the degree of risk-sharing.