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An Intertemporal CAPM with Stochastic Volatility

  • John Y. Campbell
  • Stefano Giglio
  • Christopher Polk
  • Robert Turley

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.

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File URL: http://www.nber.org/papers/w18411.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18411.

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Date of creation: Sep 2012
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Handle: RePEc:nbr:nberwo:18411
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  7. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  8. Jason Beeler & John Y. Campbell, 2009. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," NBER Working Papers 14788, National Bureau of Economic Research, Inc.
  9. Campbell, John, 1987. "Stock Returns and the Term Structure," Scholarly Articles 3207699, Harvard University Department of Economics.
  10. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
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