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An Intertemporal CAPM with Stochastic Volatility

Listed author(s):
  • 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
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. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
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