Abstract
I propose an investment-based asset pricing model augmented with intangible capital and transient volatility shock. Already-acquired intangible capital and new R&D investment are complementary inputs in knowledge production. The distinctive evolutionary dynamics of intangible capital as opposed to that of physical capital mitigate the negative impact of temporary volatility shock on output. Physical-capital-intensive value firms are thus more exposed to volatility risk and require more premium. The value premium is unconditionally positive ex ante, and the expected return of value firms surges conditionally upon a temporary volatility shock.