Asset Pricing in the Frequency Domain: Theory and Empirics, Review of Financial Studies
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.
Ian Dew-Becker, Stefano Giglio
Dew-Becker, Ian, and Stefano Giglio. 2016. Asset Pricing in the Frequency Domain: Theory and Empirics. Review of Financial Studies. 29(8): 2029-2068.