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Asset pricing in the frequency domain: theory and empirics

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Listed:
  • Stefano Giglio

    (University of Chicago)

  • Ian Dew-Becker

    (Federal Reserve Bank of San Francisco)

Abstract

In many affine asset pricing models, the innovation to the pricing kernel is a function of innovations to current and expected future values of an economic state variable, often consumption growth, aggregate market returns, or short-term interest rates. The impulse response of the priced state variable to various shocks has a frequency (Fourier) decomposition, and we show that the price of risk for a given shock can be represented as a weighted integral over that spectral decomposition. In terms of consumption growth, Epstein-Zin preferences imply that the weight of the pricing kernel lies largely at low frequencies, while internal habit-formation models imply that the weight is shifted to high frequencies. We estimate spectral weighting functions for the equity market semi-parametrically and find that they place most of their weight at low frequencies, consistent with Epstein-Zin preferences. For Treasuries, we find that investors view increases in interest rates at low frequencies and decreases at business-cycle frequencies negatively.

Suggested Citation

  • Stefano Giglio & Ian Dew-Becker, 2013. "Asset pricing in the frequency domain: theory and empirics," 2013 Meeting Papers 1244, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:1244
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    More about this item

    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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