Nontraded Sector Growth Risks and Economic Sizes in International Asset Pricing

Thuy-Duong Tô () and Ngoc-Khanh Tran ()
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Thuy-Duong Tô: School of Banking and Finance, UNSW Business School, The University of New South Wales, Sydney, New South Wales 2052, Australia
Ngoc-Khanh Tran: Pamplin College of Business, Virginia Tech, Blacksburg, Virginia 24060

Management Science, 2024, vol. 70, issue 12, 8448-8463

Abstract: Output fluctuations in nontraded sectors are an important country-specific risk factor because nontraded outputs are only consumed domestically. In interest rate markets, countries with higher nontraded output growth risks are associated with stronger motives for precautionary savings and lower interest rates. In currency markets, strategies with higher exposures to nontraded output growth risks offer higher average excess returns. Economic sizes play an important role in exacerbating the pricing impact of nontraded output growth risks as it requires larger international trades to mitigate nontraded output risks of larger economies. However, because economic sizes are functions of outputs in equilibrium, output growth risks also explain this role of economic sizes in international asset pricing.

Keywords: nontraded output risks; exchange rates; currency returns; interest rates (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8448-8463

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