An Intertemporal CAPM with Stochastic Volatility

61 Pages Posted: 22 Sep 2012

See all articles by John Y. Campbell

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: September 2012

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 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.

Suggested Citation

Campbell, John Y. and Giglio, Stefano and Polk, Christopher and Turley, Robert, An Intertemporal CAPM with Stochastic Volatility (September 2012). NBER Working Paper No. w18411, Available at SSRN: https://ssrn.com/abstract=2150542

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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Stefano Giglio

Yale School of Management ( email )

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Christopher Polk

London School of Economics ( email )

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Robert Turley

Harvard University ( email )

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HOME PAGE: http://www.people.fas.harvard.edu/~turley/

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