Growth Risk of Nontraded Industries and Asset Pricing
69 Pages Posted: 17 Jun 2019 Last revised: 6 Sep 2019
Date Written: June 7, 2019
This paper shows that output fluctuations in nontraded industries are a central risk factor driving asset prices in all countries. Because nontraded outputs are consumed domestically, their growth risk is mostly non-diversifiable. In interest rate markets, fluctuations in the growth of industries with higher nontradability feed greater risk to the economy and lower interest rates. In currency markets, these fluctuations induce co-movements between countries' marginal utilities and exchange rates, and generate large currency premia. The nontraded output growth risk presents a rationale for why known funding and investment currencies are associated with economies of diverse sizes.
Keywords: Nontraded output risk, Exchange rate, Currency carry trade, Interest rate
JEL Classification: F3, F31, F4, G0, G12, G15
Suggested Citation: Suggested Citation