Download this Paper Open PDF in Browser

An Intertemporal CAPM with Stochastic Volatility

72 Pages Posted: 15 Mar 2012 Last revised: 15 Sep 2016

John Y. Campbell

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

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Christopher Polk

London School of Economics

Robert Turley

Harvard University

Multiple version iconThere are 3 versions of this paper

Date Written: August 31, 2016

Abstract

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 overweighting value stocks and other equity portfolios that are attractive to short-term investors. We show that a conservative long-term investor will avoid such overweights 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.

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

JEL Classification: G12, N22

Suggested Citation

Campbell, John Y. and Giglio, Stefano and Polk, Christopher and Turley, Robert, An Intertemporal CAPM with Stochastic Volatility (August 31, 2016). Available at SSRN: https://ssrn.com/abstract=2021846 or http://dx.doi.org/10.2139/ssrn.2021846

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

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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/

Paper statistics

Downloads
714
Rank
28,088
Abstract Views
3,578