An Intertemporal CAPM with Stochastic Volatility

OMI Seminar Series

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. The paper presents evidence that growth stocks underperform value stocks because they hedge two types of deteriora­tion in investment opportunities: declining expected stock returns, and increasing volatility. Volatility hedging is also relevant for pricing risk-sorted portfolios and non-equity assets such as equity index options and corporate bonds.

A joint work with Stefano Giglio (Chicago Booth), Christopher Polk (LSE), and Bob Turley (Harvard). 

Location:
Speaker(s):

John Campbell (Harvard University)

Date:
Friday, March 30, 2012 - 12:30
to 13:30