An Intertemporal CAPM with Stochastic Volatility
John Campbell (),
Stefano Giglio (),
Christopher Polk and
No 10681, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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
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Journal Article: An intertemporal CAPM with stochastic volatility (2018)
Working Paper: An Intertemporal CAPM with Stochastic Volatility (2012)
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