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An Intertemporal CAPM with Stochastic Volatility

Author

Listed:
  • Campbell, John Y
  • Polk, Christopher
  • Giglio, Stefano
  • Turley, Robert
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 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.

Suggested Citation

  • Campbell, John Y & Polk, Christopher & Giglio, Stefano & Turley, Robert, 2015. "An Intertemporal CAPM with Stochastic Volatility," CEPR Discussion Papers 10681, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10681
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    More about this item

    Keywords

    Icapm; Time-varying expected returns; stochastic volatility; Value premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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