@techreport{NBERw19416,
title = "Asset Pricing in the Frequency Domain: Theory and Empirics",
author = "Ian Dew-Becker and Stefano Giglio",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "19416",
year = "2013",
month = "September",
doi = {10.3386/w19416},
URL = "http://www.nber.org/papers/w19416",
abstract = {In 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, for example consumption growth, aggregate market returns, or short-term interest rates. The impulse response of this priced variable to fundamental shocks has a frequency (Fourier) decomposition, which captures the fluctuations induced in the priced variable at different frequencies. We show that the price of risk for a given shock can be represented as a weighted integral over that spectral decomposition. The weight assigned to each frequency then represents the frequency-specific price of risk, and is entirely determined by the preferences of investors. For example, standard Epstein-Zin preferences imply that the weight of the pricing kernel lies almost entirely at extremely low frequencies, most of it on cycles longer than 230 years; internal habit-formation models imply that the weight is shifted to high frequencies. We estimate the frequency-specific risk prices for the equity market, focusing on economically interesting frequencies. Most of the pricing weight falls on low frequencies – corresponding to cycles longer than 8 years – broadly consistent with Epstein-Zin preferences.},
}