Intertemporal portfolio theory and asset pricing

Abstract

The intent of this entry is to present intertemporal portfolio theory and asset pricing models, to explain their results and to illustrate the differences between multiperiod and single-period models. To appreciate intertemporal portfolio theory and asset pricing, it is necessary to understand the state of finance theory prior to the seminal intertemporal works of Merton (1969, 1971, 1973), Samuelson (1969), Fama (1970), Hakansson (1970) and Rubinstein (1974). Section “Single-Period Portfolio Theory and Asset Pricing” presents single-period theory and some general results on portfolio statistics. Section “Intertemporal Portfolio Theory” presents intertemporal portfolio theory. Section “Intertemporal Capital Asset Pricing Model (ICAPM)” presents the intertemporal asset pricing model, and Section “Consumption-Oriented Asset Pricing Model (CCAPM)” presents the consumption-oriented representation of it. Section “Extensions and Conclusions” gives important extensions (without proof) and concludes the entry.KeywordsAsset PriceMarginal UtilityOptimal PortfolioRisky AssetExcess ReturnThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.