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An Intertemporal CAPM with Stochastic Volatility

John Campbell (), Stefano Giglio (), Christopher Polk and Robert Turley

No 10681, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: G12 N22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-ifn, nep-ore and nep-rmg
Date: 2015-06
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Related works:
Journal Article: An intertemporal CAPM with stochastic volatility (2018) Downloads
Working Paper: An Intertemporal CAPM with Stochastic Volatility (2012) Downloads
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