Discussion Paper Series, University of Heidelberg, Department of Economics 568
In this paper we study the effects of ﬁnancial integration on risk-sharing. Conventional macroeconomic theory suggests that the integration of ﬁnancial markets improves welfare. In contrast to the literature we assume that households have heterogeneous beliefs. Because of the differences in beliefs, households are not only sharing the risk but also speculating. We show that with speculation, ﬁnancial integration can increase the risk in the economy and that a full ﬁnancial integration is not always beneﬁcial. We also have a numerical example for a small set of countries and show that the losses due to heterogeneous beliefs are small.