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Asset Pricing in the Frequency Domain: Theory and Empirics

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  • Ian Dew-Becker
  • Stefano Giglio

Abstract

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. Finally, 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. Received January 13, 2015; accepted February 23, 2016 by Editor Leonid Kogan.

Suggested Citation

  • Ian Dew-Becker & Stefano Giglio, 2016. "Asset Pricing in the Frequency Domain: Theory and Empirics," Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2029-2068.
  • Handle: RePEc:oup:rfinst:v:29:y:2016:i:8:p:2029-2068.
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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