Intertemporal CAPM
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The Intertemporal Capital Asset Pricing Model, or ICAPM, was an alternative to the CAPM provided by Robert Merton. It is a linear factor model with wealth and state variable that forecast changes in the distribution of future returns or income.
In the ICAPM investors are solving lifetime consumption decisions when faced with more than one uncertainty. The main difference between ICAPM and standard CAPM is the additional state variables that acknowledge the fact that investors hedge against shortfalls in consumption or against changes in the future investment opportunity set.
[edit] References
- Merton, R.C., (1973), An Intertemporal Capital Asset Pricing Model. Econometrica 41, Vol. 41, No. 5. (Sep., 1973), pp. 867-887
- "Multifactor Portfolio Efficiency and Multifactor Asset Pricing" by Eugene F. Fama, (The Journal of Financial and Quantitative Analysis), Vol. 31, No. 4, Dec., 1996
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