An Intertemporal CAPM with Stochastic Volatility

62 Pages Posted: 29 Jun 2015

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

Dodge & Cox Funds

Multiple version iconThere are 3 versions of this paper

Date Written: June 2015

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.

Keywords: ICAPM, stochastic volatility, time-varying expected returns, 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 (June 2015). CEPR Discussion Paper No. DP10681, Available at SSRN: https://ssrn.com/abstract=2624636

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 )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/polk/

Robert Turley

Dodge & Cox Funds ( email )

c/o Boston Financial Data Services
P.O. Box 8422
Boston, MA 02266-8422
United States

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