An Intertemporal Capital Asset Pricing Model

Abstract

AN INTERTEMPORAL CAPITAL ASSET PRICING MODEL' BY ROBERT C. 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. Explicit demand functions for assets are derived, and it is shown that, unlike the one-period model, current demands are affected by the possibility of uncertain changes in future investment opportunities. 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.

The Intertemporal Relation between Expected Return and Risk on Currency

“…Some studies do provide evidence supporting a positive and significant relation between expected return and 13 risk on stock market portfolios (e.g., Bollerslev, Engle, and Wooldridge (1988), Scruggs (1998), Ghysels, Santa-Clara, and Valkanov (2005), Bali and Peng (2006), Guo and Whitelaw (2006), Lundblad (2007), and Bali (2008)). Merton's (1973) ICAPM provides a theoretical model that gives a positive equilibrium relation between the conditional first and second moments of excess returns on the aggregate market portfolio.…”

“…In risk-return regressions, it is not common to use the realized variance measures obtained from the intraday data. In this paper, we first generate the daily realized variance based on the 5-minute returns on exchange rates and then estimate the following the risk-return regression: Merton's (1973) ICAPM, is the relative risk aversion coefficient which is expected to be positive and statistically significant.…”

“…The prediction of Merton (1973Merton ( , 1980) that expected returns should be related to conditional risk applies not only to the stock market portfolio but also to any risky portfolio. However, earlier studies have so far focused on the risk-return tradeoff in equity markets and ignored other risky financial assets.…”

Nonmyopic Optimal Portfolios in Viable Markets

“…Indeed, in Merton's (1973) intertemporal capital asset pricing 6 We assume that µ D and σ D are such that a unique strong solution exists and also that µ D ∈ C 1 (R + ),…”

Options financières et opportunités intertemporelles d’investissement irréversible en incertitude

“…La théorie des options financières depuis les travaux de Black-Scholes [8] et Merton [50] et, en général, la théorie de la formation intertemporelle des prix des avoirs en capital [51] ont contribué à la compréhension du fonctionnement d'une économie en régime d'incertitude et fourni des directions précises et empiriquement vérifiables concernant la mise en application de ces théories [9]. La théorie des investissements a tout particulièrement bénéficié de ces développements [40].…”