Growth Risk of Nontraded Industries and Asset Pricing

69 Pages Posted: 17 Jun 2019 Last revised: 6 Sep 2019

See all articles by Thuy Duong To

Thuy Duong To

University of New South Wales, Sydney; Financial Research Network (FIRN)

Ngoc-Khanh Tran

Pamplin College of Business - Virginia Tech

Date Written: June 7, 2019

Abstract

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

To, Thuy Duong and Tran, Ngoc-Khanh, Growth Risk of Nontraded Industries and Asset Pricing (June 7, 2019). Available at SSRN: https://ssrn.com/abstract=3400845 or http://dx.doi.org/10.2139/ssrn.3400845

Thuy Duong To

University of New South Wales, Sydney ( email )

School of Banking and Finance,
University of New South Wales
Sydney, 2052
Australia
61295855865 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Ngoc-Khanh Tran (Contact Author)

Pamplin College of Business - Virginia Tech ( email )

Pamplin 2126
880 West Campus Drive
Blacksburg, VA 24061
United States

HOME PAGE: http://https://www.nktran.com/

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