Frequency Dependent Risk

58 Pages Posted: 26 Oct 2018 Last revised: 16 Oct 2019

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: October 16, 2019

Abstract

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

Suggested Citation

Neuhierl, Andreas and Varneskov, Rasmus Tangsgaard, Frequency Dependent Risk (October 16, 2019). 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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