NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Intertemporal CAPM with Stochastic Volatility

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

NBER Working Paper No. 18411
Issued in September 2012
NBER Program(s):   AP

This paper extends the approximate closed-form intertemporal capital asset pricing model of Campbell (1993) to allow for stochastic volatility. The return on the aggregate stock market is modeled as one element of a vector autoregressive (VAR) system, and the volatility of all shocks to the VAR is another element of the system. Our estimates of this VAR reveal novel low-frequency movements in market volatility tied to the default spread. We show that growth stocks underperform value stocks because they hedge two types of deterioration in investment opportunities: declining expected stock returns, and increasing volatility.

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An online appendix is available for this publication.

This paper was revised on July 16, 2013

Acknowledgments and Disclosures

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