Frequency Dependent Risk

Andreas Neuhierl, Rasmus T. Varneskov

Publikation: KonferencebidragPaperForskningpeer review

Abstrakt

This paper provides a new nonparametric framework for studying the dynamics of the state vector and its associated risk prices. Specifically, in a general setting where the 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 its transitory components, that is, through the state vector. Moreover, we demonstrate that state vector dynamics and its risk prices can be uncovered by studying (transformations of) the covariance between (portfolios of) asset returns. We introduce two new frequency risk measures. We apply our framework to study frequency risk in the full cross-section of US stocks, utilizing the market, value, size and momentum factors as baseline portfolios to construct the risk measures. Our analysis uncovers the existence of, at least, two significantly priced low-frequency risk factors, one of which commands a large positive risk premium of 6% per year. Moreover, we document, at least, one high-frequency component in the state vector that is significantly priced. Importantly, we show that these frequency dependent risk factors are unspanned by a battery of appraised risk factors and characteristics. Our analysis demonstrates that multiple state vector components with varying persistence and risk prices are needed to be consistent with the cross-section. Throughout, we contrast our findings with the implications of the long-run risk model, the dynamic disaster model as well as a regime-switching CCAPM, providing new analytical results for such models.
OriginalsprogEngelsk
Publikationsdato2019
Antal sider50
StatusUdgivet - 2019
BegivenhedMidwest Finance Association 2019 Annual Meeting - Radisson Blu Aqua Hotel, Chicago, USA
Varighed: 7 mar. 20199 mar. 2019
Konferencens nummer: 68
https://www.openconf.org/MidwestFinance2019/modules/request.php?module=oc_program&action=program.php&p=program

Konference

KonferenceMidwest Finance Association 2019 Annual Meeting
Nummer68
LokationRadisson Blu Aqua Hotel
LandUSA
ByChicago
Periode07/03/201909/03/2019
Internetadresse

Emneord

  • Asset pricing
  • Factor models
  • Nonparametric measures
  • Spectral analysis

Citationsformater