text xxu Amsterdam Elsevier May 2018 monographic eng

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Pages 207-233 John Y. Campbell, Stefano Giglio, Christopher Polk, Robert Turley Abstract 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 instead of overweighting value stocks and other equity portfolios that are attractive to short-term investors. We show that a conservative long-term investor will avoid such overweights to hedge against two types of deterioration in investment opportunities: declining expected stock returns and increasing volatility. 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. 0304-405X 190322