An Intertemporal CAPM with Stochastic Volatility
John Campbell (),
Stefano Giglio (),
Christopher Polk and
No 18411, NBER Working Papers from National Bureau of Economic Research, Inc
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.
JEL-codes: G12 N22 (search for similar items in EconPapers)
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Published as John Y. Campbell & Stefano Giglio & Christopher Polk & Robert Turley, 2018. "An intertemporal CAPM with stochastic volatility," Journal of Financial Economics, .
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Journal Article: An intertemporal CAPM with stochastic volatility (2018)
Working Paper: An Intertemporal CAPM with Stochastic Volatility (2015)
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