Asset Pricing in the Frequency Domain: Theory and Empirics

Ian Dew-Becker and Stefano Giglio

The Review of Financial Studies, 2016, vol. 29, issue 8, 2029-2068

Abstract: We quantify investors’ preferences over the dynamics of shocks by deriving frequency-specific risk prices that capture the price of risk of consumption fluctuations at each frequency. The frequency-specific risk prices are derived analytically for leading models. The decomposition helps measure the importance of economic fluctuations at different frequencies. We precisely quantify the meaning of "long-run" in the context of Epstein-Zin preferences – centuries – and measure the exact relevance of business-cycle fluctuations. Finally, we estimate frequency-specific risk prices and show that cycles longer than the business cycle – long-run risks – are significantly priced in the equity market. Received January 13, 2015; accepted February 23, 2016 by Editor Leonid Kogan.

Date: 2016
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Working Paper: Asset Pricing in the Frequency Domain: Theory and Empirics (2013)
Working Paper: Asset pricing in the frequency domain: theory and empirics (2013)
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