Multifrequency News and Asset Returns

Abstract

This paper develops a parsimonious asset-pricing economy with Epstein-Zin consumers and multifrequency regime-shifts in dividend news. We solve for equilibrium asset prices under different learning environments, and show that the methodology remains tractable when the state space is very large. In an empirical application, we specialize to a volatility feedback setting where dividend news have constant mean and multifrequency stochastic volatility. We find that relatively large numbers of volatility components give the best fit to the data, and improve on the classic Campbell and Hentschel (1992) specification. The unconditional volatility feedback effect is up to ten times larger than in previous literature. We also identify an endogenous tradeoff between skewness and kurtosis as the volatility information available to investors increases. Economies with intermediate levels of information best match the data. The model thus provides a parsimonious structural econometric model for the time-series of asset returns that incorporates multifrequency shocks to fundamentals.