Risk aversion and intertemporal substitution in the capital. Assumptions these notes are based on the article robert c. Arbitrage pricing theory and intertemporal capital asset pricing model 1. If a real riskless asset or portfolio is assumed to exist and have a real return of r, then the expected return on a zero real consumptionbeta portfolio in the pricing eq. An intertemporal capital asset pricing model with owneroccupied housing yongqiang chu school of business university of wisconsin email. This model generalizes the marketreturn decomposition framework, showing that intertemporal considerations imply a decomposition of squared market returns coskewness risk. An intertemporal capital asset pricing model jstor. Multifactor models regarding intertemporal capital asset pricing model icapm assumptions on european and us market data. Merton 1973 introduces an intertemporal capital asset pricing model icapm in which an asset s expected return depends on its covariance with the market portfolio and with state variables that proxy for changes in investment opportunity set. The intertemporal capital asset pricing model with dynamic conditional correlations. Idiosyncratic volatility and the intertemporal capital. Since the seminal work of merton 1973 on the intertemporal capital asset pricing model icapm, a large empirical literature has explored the relevance of intertemporal considerations for the pricing of nancial assets in general, and the crosssectional pricing of stocks in particular.
Merton 1973 introduces an intertemporal capital asset pricing model icapm in which an assets expected return depends on its covariance with the market. So, it turns out that the model s implications hold in more general contexts. The model is to maximize the expected utility of lifetime consumption and to assume the investors trade continuously. Risk aversion and intertemporal substitution in the capital asset pricing model article pdf available february 1989 with 71 reads how we measure reads. This paper extends the intertemporal capital asset pricing model icapm to integrate the heterogeneous trading behavior of three groups of investors. A financial model that extends the concept of the capital asset pricing model capm to international investments.
Lo and jiang wangy october 5, 2001 abstract we derive an intertemporal capital asset pricing model with multiple assets and heterogeneous investors, and explore its implications for the behavior of trading volume and asset. It extends the analysis in mertons earlier consumption and portfolio rules papertoconsider theequilibrium relations between assetrates. Breeden stanford university, stanford, ca 94305, usa received october 1978, revised version received july 1979 this paper derives a singlebeta asset pricing model in a multigood, continuoustime model. The unique feature of the model is that housing is a consumption good as well as a risky asset. Intertemporal capital asset pricing model icapm investopedia. We begin by developing an intertemporal capital asset pricing ple assets in the spirit of mertons icapm merton, 1973. An intertemporal capital asset pricing model robert c.
Solve static problem instead of intertemporal problem 2. An intertemporal capital asset pricing model author. We begin by developing an intertemporal capital asset pricing model of multi ple assets in the spirit of mertons icapm merton, 1973. Ross 1985 an intertemporal general equilibrium model of asset prices, econometrica 53, p. We derive an intertemporal asset pricing model and explore its implications for trading volume and asset returns. Theory and evidence abstract in this paper, the aggregate consumption function is characterized as a nonlinear function of the market and hedge factors to derive a threemoment intertemporal capital asset pricing model that prices coskewness. In a homoskedastic lognormal setting, the consumptionwealth ratio is shown to depend on the elasticity of intertemporal substitution in consumption, while asset risk premia are determined by. After aggregating demands and requiring market clearing, the equilibrium relationships among expected returns are derived, and contrary to the classical capital asset pricing model, expected returns on risky assets may differ from the riskless rate even when they have no systematic or market risk. Nov, 2019 international capital asset pricing model capm. Lo and jiang wangy october 5, 2001 abstract we derive an intertemporal capital asset pricing model with multiple assets and heterogeneous investors, and explore its implications for the behavior of trading volume and asset returns. An intertemporal capital asset pricing model with owneroccupied housing this is a wileyblackwell publishing paper.
A model of intertemporal asset prices under asymmetric information jiang wang massachusetts institute of technology first version received february 1991, jnal version accepted september 1992 eds. Merton an intertemporal model for the capital market is deduced from the portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime consumption and who can trade continuously in. Intertemporal equilibrium pricingmarch 12, 2020 6 48 the consumption capital asset pricing model again. Pdf an intertemporal capital asset pricing model researchgate. The intertemporal capital asset pricing model with dynamic. However, in the intertemporal capitalassetpricingmodel framework 20, our finding implies that investors are willing to pay an insurance premium because stocks with high sensitivity to sustainable volatility offer a hedging opportunity against future uncertainty and are attractive despite low returns. Merton an intertemporal model for the capital market is deduced from the portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime consumption and who can trade continuously in time. Merton 1973 an intertemporal capital asset pricing model, econometrica 41, p. An intertemporal asset pricing model with stochastic consumption and investment opportunities douglas t. This paper plays a part in two branches of the asset pricing literature, the multifactor literature built on the arbitrage pricing theory apt from ross 1976 1 and the intertemporal capital. We derive an intertemporal capital asset pricing model with multiple assets and heterogeneous investors, and explore its implications for the behavior of trading volume and asset returns. Section iii contains a description of the data used in our empirical implementation of the model, as well as an outline of the construc. Pdf intertemporal capital asset pricing and the famafrench. In a simple model with a constant rate of return, for example, the.
The capm model deals with the question of how asset prices and yields are determined, under the hypothesis that the riskfree interest rate and market return are variables determined outside the model. Breeden, an intertemporal asset pricing model individual ks fraction of wealth invested in the riskless asset. My bayesian framework accounts for uncertainty in the intertemporal risk factor and gauges the effects of prior information about investment opportunities on model inferences. Ross this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices. We show that investors trade in only two portfolios. Characterizing the instantaneous investment opportunity set by the real interest rate and the maximum sharpe ratio, a simple model of time varying investment opportunities is posited in which these two variables follow correlated ornsteinuhlenbeck processes, and the implications for stock and bond valuation are developed. Whereas capm uses market movement to predict a stocks return, ccapms explain the markets movement or a securitys movement by its relationship to aggregate consumption. An intertemporal capital asset pricing model with owner. This model generalizes the marketreturn decomposition framework, showing that intertemporal considerations. The intertemporal capital asset pricing model icapm predicts that an unobservable factor capturing changes in expected market returns should be priced in the cross section. An intertemporal asset pricing model with stochastic. We develop an intertemporal asset pricing model where cashflow news, discountrate news, and their second moments are priced by the market. This paper presents a dynamic assetpricing model under asymmetric information.
Advancing the capital asset pricing model capm arno popanda term paper advanced seminar economics finance publish your bachelors or masters thesis, dissertation, term paper or essay. Idiosyncratic volatility and the intertemporal capital asset. Each individual k has a stochastic number of labor units, y, that yield a continuous wage income rate of iyk. Multifactor models regarding intertemporal capital asset. Campbell 1993 pointed out that the intertemporal budget constraint could be used to substitute out consumption growth, turning the model into a mertonstyle icapm. In section ii, we explore the models implications for volume and returns. Implications of an intertemporal capital asset pricing model. A threemoment intertemporal capital asset pricing model. Pdf an intertemporal model for the capital market is deduced from the portfolio selection behavior by an arbitrary number of investors who act. This paper explores whether risk as measured by an alternative benchmark pricing model can explain the accrual anomaly. It is a linear factor model with wealth as state variable that forecast changes in the distribution of future returns or income. The intertemporal capital asset pricing model, or icapm, is an alternative to the capm provided by robert merton. The meanreverting dcc model is used to estimate a stocks portfolios conditional covariance with the market and test whether the conditional covariance predicts timevariation in the stocks portfolios expected return. The authors are grateful to john cochrane for comments on a previous draft.
Jan 11, 2007 we derive an intertemporal asset pricing model and explore its implications for trading volume and asset returns. An intertemporal capital asset pricing model created date. An intertemporal capital asset pricing model the evidence. Icapm shows that such assets should deliver lower aver age returns in equilibrium if they are priced. Intertemporal asset pricing without consumption data. An intertemporal general equilibrium model of asset prices. The intertemporal capital asset pricing model icapm is a consumptionbased capital asset pricing model ccapm that assumes investors. Mertons 1973 intertemporal capital asset pricing model icapm shows that such assets should deliver lower average returns in equilibrium if they are priced from conservative longterm investorsrstorder conditions. Request pdf an intertemporal capital asset pricing model with owneroccupied housing this article studies portfolio choice and asset pricing in the presence of owneroccupied housing in a. Theory and evidence abstract in this paper, the aggregate consumption function is characterized as a nonlinear function of the market and hedge factors to derive a threemoment intertemporal capital asset pricing model that.
Coskewness risk decomposition, covariation risk, and. Mertons 1973 intertemporal capital asset pricing model. The intertemporal capital asset pricing model icapm is a consumptionbased asset pricing model that provides the expected return on a security. Implications of an intertemporal capital asset pricing model created date. Asset pricing i slide 118 static problem intertemporal problem in general icapm setting crra with 1 and changing investment opportunity sets special cases 1. In finance, the capital asset pricing model capm is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a welldiversified portfolio. By adding owneroccupied housing into the classical analysis, the model provides more insights into asset pricing, since owneroccupied housing is di.
An intertemporal capital asset pricing model econpapers. Evidence from tests of an intertemporal capital asset pricing model mozaffar khan university of toronto this draft. A model of intertemporal asset prices under asymmetric. An intertemporal capital asset pricing model with heterogeneous expectations abstract. Icapm first introduced by merton in 1973, is an extension of capm that additionally accounts for timevarying factors. International capital asset pricing model capm definition. Intertemporal capital asset pricing model icapm definition.
G12, g11, g14 abstract we derive an intertemporal capital asset pricing model with multiple assets and heterogeneous investors, and explore its implications for the behavior of trading volume. Kalev, konark saxena, and leon zolotoy abstract we develop an intertemporal asset pricing model where cash. Under general conditions, that is, when the utility function is not cobbdouglas and the covariance matrix is not blockdiagonal, the model shows that the market portfolio is not meanvariance efficient, and the traditional capital asset pricing. The fundamental insight of intertemporal asset pricing theory is that longterm investors should care just as much about the returns they earn on their invested wealth as about the level of that wealth. When the true asset pricing model cannot be identified, the idiosyncratic volatility obtained from a misspecified model contains information of the hedge portfolio in mertons 1973 icapm. In section i, we present our intertemporal equilibrium model of assetpricing and trading volume. The capital asset pricing model capm is an example of an equilibrium model in which asset prices are related to the exogenous data, the tastes and endowments of investors although, as we shall see below, the capm is often presented as a relative pricing model.
Mertons 1973 intertemporal capital asset pricing model icapm shows that such assets should deliver lower average returns in equilibrium if they are priced from conservative longterm investors rstorder conditions. Cochrane 1992 and jagannathan and wang 1994 show that a singlefactor conditional asset pricing model, such as a. A financial model that takes into account major sources of risk when optimizing consumption over a period of time. Pdf the intertemporal capital asset pricing model with. Intertemporal capital asset pricing and the famafrench threefactor model. Implications of an intertemporal capital asset pricing model andrew w. The intertemporal capital asset pricing model with. Building on recent advances in the finance literature, the paper proposes a fourfactor model motivated by the intertemporal capital asset pricing model icapm, and based on. It states that, besides the market risk, risk of unfavorable shifts in the investment opportunity set proxied by. The intertemporal capital asset pricing model icapm is a consumptionbased assetpricing model.
577 258 72 1143 846 1196 1049 628 1360 1283 1334 1408 339 514 1448 1145 508 538 1378 1483 507 333 963 1076 84 127 1214 1249 719 1438 1086 219 539 220 329