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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 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.

Suggested Citation

  • Campbell, John Y. & Giglio, Stefano & Polk, Christopher & Turley, Robert, 2018. "An Intertemporal CAPM with stochastic volatility," LSE Research Online Documents on Economics 69634, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:69634
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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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