Asset Pricing in the Frequency Domain: Theory and Empirics
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. Last, 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.
Dew-Becker, Ian and Stefano Giglio. Forthcoming. Asset Pricing in the Frequency Domain: Theory and Empirics. Review of Financial Studies.