Frequency Dependent Risk

Andreas Neuhierl*, Rasmus T. Varneskov

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We provide a model-free framework for studying the dynamics of the state vector and its risk prices. Specifically, we derive a frequency domain decomposition of the unconditional asset return premium in a general setting with a log-affine stochastic discount factor (SDF). Importantly, we show that the cospectrum between returns and the SDF only displays frequency dependencies through the state vector and that its dynamics and risk prices can be inferred from covariances between asset (portfolio) returns, that is, from the cross-section. Empirically, we find low and high-frequency state vector risk to be differentially priced for US equities.
Original languageEnglish
JournalJournal of Financial Economics
Volume140
Issue number2
Pages (from-to)644-675
Number of pages32
ISSN0304-405X
DOIs
Publication statusPublished - May 2021

Bibliographical note

Published online: 15. Januar 2021

Keywords

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

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