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An Intertemporal CAPM with Stochastic Volatility

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

NBER Working Paper No. 18411
Issued in September 2012, Revised in June 2015
NBER Program(s):Asset Pricing

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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Document Object Identifier (DOI): 10.3386/w18411

Published: John Y. Campbell & Stefano Giglio & Christopher Polk & Robert Turley, 2018. "An intertemporal CAPM with stochastic volatility," Journal of Financial Economics, . citation courtesy of

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