An Intertemporal CAPM with stochastic volatility

John Campbell, Stefano Giglio, Christopher Polk and Robert Turley

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper studies the pricing of volatility risk using the Örst-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.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2018-05-01
New Economics Papers: this item is included in nep-ore and nep-rmg
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Citations: View citations in EconPapers (86)

Published in Journal of Financial Economics, 1, May, 2018, 128(2), pp. 207-233. ISSN: 0304-405X

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http://eprints.lse.ac.uk/69634/ Open access version. (application/pdf)

Related works:
Journal Article: An intertemporal CAPM with stochastic volatility (2018)
Working Paper: An Intertemporal CAPM with Stochastic Volatility (2015)
Working Paper: An Intertemporal CAPM with Stochastic Volatility (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:69634

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