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, Revised in June 2015
NBER Program(s):AP

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

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