Structural asset pricing theory with wavelets

Elizabeth Ann Housworth, Todd Walker and Chen Xu

Quantitative Finance, 2019, vol. 19, issue 10, 1659-1672

Abstract: We apply Fourier and wavelet decompositions to structural asset pricing models with time non-separable utility. Through simulations, we show how Fourier decompositions of the utility function, coupled with isolating certain frequencies of the stochastic consumption process, reveal a preference for temporal allocations. We demonstrate the usefulness of wavelets by highlighting their ability to isolate frequency and time, simultaneously. While much work has been devoted to wavelet applications of financial data, we are unaware of papers that use wavelets to analyze structural aspects of asset pricing models.

Date: 2019
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DOI: 10.1080/14697688.2019.1594350

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