Abstract

http://ssrn.com/abstract=2021846
 
 

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An Intertemporal CAPM with Stochastic Volatility


John Y. Campbell


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Stefano Giglio


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Christopher Polk


London School of Economics

Robert Turley


Harvard University

June 23, 2013


Abstract:     
This paper extends the approximate closed-form intertemporal capital asset pricing model of Campbell (1993) to allow for stochastic volatility. The return on the aggregate stock market is modeled as one element of a vector autoregressive (VAR) system, and the volatility of all shocks to the VAR is another element of the system. Our estimates of this VAR reveal novel low-frequency movements in market volatility tied to the default spread. We show that growth stocks underperform value stocks because they hedge two types of deterioration in investment opportunities: declining expected stock returns, and increasing volatility.

Number of Pages in PDF File: 81

Keywords: ICAPM, time-varying expected returns, stochastic volatility, value premium

JEL Classification: G12, N22

working papers series


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Date posted: March 15, 2012 ; Last revised: June 24, 2013

Suggested Citation

Campbell, John Y. and Giglio, Stefano and Polk, Christopher and Turley, Robert, An Intertemporal CAPM with Stochastic Volatility (June 23, 2013). Available at SSRN: http://ssrn.com/abstract=2021846 or http://dx.doi.org/10.2139/ssrn.2021846

Contact Information

John Y. Campbell
Harvard University - Department of Economics ( email )
Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)
HOME PAGE: http://scholar.harvard.edu/campbell
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stefano Giglio
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Christopher Polk (Contact Author)
London School of Economics ( email )
United Kingdom
HOME PAGE: http://personal.lse.ac.uk/polk/
Robert Turley
Harvard University ( email )
1875 Cambridge Street
Cambridge, MA 02138
United States
646-484-8614 (Phone)
HOME PAGE: http://www.people.fas.harvard.edu/~turley/
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