Asset pricing in the frequency domain: theory and empirics
Stefano Giglio () and
Ian Dew-Becker ()
No 1244, 2013 Meeting Papers from Society for Economic Dynamics
In many affine asset pricing models, the innovation to the pricing kernel is a function of innovations to current and expected future values of an economic state variable, often consumption growth, aggregate market returns, or short-term interest rates. The impulse response of the priced state variable to various shocks has a frequency (Fourier) decomposition, and we show that the price of risk for a given shock can be represented as a weighted integral over that spectral decomposition. In terms of consumption growth, Epstein-Zin preferences imply that the weight of the pricing kernel lies largely at low frequencies, while internal habit-formation models imply that the weight is shifted to high frequencies. We estimate spectral weighting functions for the equity market semi-parametrically and find that they place most of their weight at low frequencies, consistent with Epstein-Zin preferences. For Treasuries, we find that investors view increases in interest rates at low frequencies and decreases at business-cycle frequencies negatively.
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Journal Article: Asset Pricing in the Frequency Domain: Theory and Empirics (2016)
Working Paper: Asset Pricing in the Frequency Domain: Theory and Empirics (2013)
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