Frequency Dependent Risk

67 Pages Posted: 26 Oct 2018 Last revised: 23 Apr 2020

See all articles by Andreas Neuhierl

Andreas Neuhierl

University of Notre Dame - Department of Finance

Rasmus Tangsgaard Varneskov

Copenhagen Business School - Department of Finance; Nordea Bank AB - Nordea Asset Management

Date Written: April 22, 2020

Abstract

We provide a model-free framework for studying the dynamics of the state vector and its risk prices. Specifically, we derive a frequency domain decomposition of the unconditional asset return premium in a general setting with a log-affine stochastic discount factor (SDF). Importantly, we show that the co-spectrum between returns and the SDF only displays frequency dependencies through the state vector, and that its dynamics and risk prices can be infered from covariances between asset (portfolio) returns, i.e., from the cross-section. Empirically, we find low \textit{and} high-frequency state vector risk to be differentially priced for US equities.

Keywords: Asset Pricing, Factor Models, Nonparametric Measures, Spectral Analysis

JEL Classification: C1, G1, G11, G12

Suggested Citation

Neuhierl, Andreas and Varneskov, Rasmus Tangsgaard, Frequency Dependent Risk (April 22, 2020). Available at SSRN: https://ssrn.com/abstract=3260167 or http://dx.doi.org/10.2139/ssrn.3260167

Andreas Neuhierl (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Rasmus Tangsgaard Varneskov

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Nordea Bank AB - Nordea Asset Management ( email )

PO Box 850
Copenhagen, 0900
Denmark

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