An Intertemporal CAPM with Stochastic Volatility
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CitationCampbell, John Y., Stefano Giglio, Christopher Polk, and Robert Turley. 2017. An Intertemporal CAPM with Stochastic Volatility. Working paper.
AbstractThis 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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