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An intertemporal CAPM with stochastic volatility

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  • Campbell, John Y.
  • Giglio, Stefano
  • Polk, Christopher
  • 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 instead of 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 to hedge against two types of deterioration in investment opportunities: declining expected stock returns and increasing volatility. 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.

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  • Campbell, John Y. & Giglio, Stefano & Polk, Christopher & Turley, Robert, 2018. "An intertemporal CAPM with stochastic volatility," Journal of Financial Economics, Elsevier, vol. 128(2), pages 207-233.
  • Handle: RePEc:eee:jfinec:v:128:y:2018:i:2:p:207-233
    DOI: 10.1016/j.jfineco.2018.02.011
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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