Frequency Dependent Risk
58 Pages Posted: 26 Oct 2018 Last revised: 16 Oct 2019
Date Written: October 16, 2019
We provide a nonparametric framework for studying state vector dynamics and its associated risk prices. In a setting where the stochastic discount factor (SDF) decomposes into permanent and transitory components, we analyze their contribution to the unconditional asset return premium using frequency domain techniques. We show analytically that the co-spectrum between returns and the SDF only displays frequency dependencies through the state vector. Moreover, we demonstrate that state vector dynamics and its risk prices can be uncovered by studying the covariance between asset returns. Empirically, we find low and high-frequency risk to be differentially priced for US equities.
Keywords: Asset Pricing, Factor Models, Nonparametric Measures, Spectral Analysis
JEL Classification: C1, G1, G11, G12
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