An Intertemporal CAPM with Stochastic Volatility
John Y. Campbell
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Stefano W. Giglio
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
London School of Economics
February 29, 2016
This paper studies the pricing of volatility risk using the first-order conditions of a long-term equity investor who is content to hold the aggregate equity market rather than tilting towards value stocks and other equity portfolios that are attractive to short-term investors. We show that a conservative long-term investor will avoid such tilts in order to hedge against two types of deterioration in investment opportunities: declining expected stock returns, and increasing volatility. Empirically, we present novel evidence that low-frequency movements in equity volatility, tied to the default spread, are priced in the cross-section of stock returns.
Number of Pages in PDF File: 66
Keywords: ICAPM, time-varying expected returns, stochastic volatility, value premium
JEL Classification: G12, N22
Date posted: March 15, 2012 ; Last revised: March 16, 2016
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