Intertemporal Capital Asset Pricing Model - ICAPM

AAA

DEFINITION of 'Intertemporal Capital Asset Pricing Model - ICAPM'

A financial model that takes into account major sources of risk when optimizing consumption over a period of time. The intertemporal capital asset pricing model (ICAPM) assumes that security returns are normally distributed over multiple time periods, and that all future consumption will be funded by security returns.

ICAPM was described by Nobel laureate Robert Merton in 1973.

INVESTOPEDIA EXPLAINS 'Intertemporal Capital Asset Pricing Model - ICAPM'

ICAPM is a consumption-based asset-pricing model, and it goes a step further than CAPM in taking into account how investors participate in the market. Most investors do not participate in financial markets for one year, but instead for multiple years. Over longer time periods, investment opportunities might shift as expectations of risk change, resulting in situations in which investors may wish to hedge. For example, an investment may perform better in bear markets, and an investor may consider holding that asset if a downturn in the business cycle is expected.

ICAPM uses mean-variance analysis to create normal distribution of consumption risk over time. Because ICAPM covers multiple time periods, multiple beta coefficients are used to determine how many security concerns covary with a basket of risky securities.

A criticism of ICAPM is that it assumes that consumer expectations are homogenous, meaning that it cannot take into account individual risk preferences.

RELATED TERMS
  1. International Capital Asset Pricing ...

    A financial model that extends the concept of the capital asset ...
  2. Treynor-Black Model

    A type of asset allocation model that was developed by Jack Treynor ...
  3. Lintner's Model

    A model stating that dividend policy has two parameters: (1) ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based ...
  5. Financial Modeling

    The process by which a firm constructs a financial representation ...
  6. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
Related Articles
  1. Fundamental Analysis

    Taking Shots At CAPM

    Find out why many investors think the capital asset pricing model is full of holes.
  2. Economics

    The Taylor Rule: An Economic Model For Monetary Policy

    This interest rate forecasting model has helped central banks around the world adjust their rates to balance out inflation.
  3. Mutual Funds & ETFs

    What Are Factor Model ETFs?

    Given that stock picking is not generally effective, trackers that simply follow an index have become very popular. However, trackers have their disadvantages, too, so hybrid models between the ...
  4. Investing Basics

    Introduction To International CAPM

    ICAPM is one of several models used to determine the required return on an asset, discover its limitations and how to use it.
  5. Entrepreneurship

    Getting To Know Business Models

    Learning how to assess business models helps investors identify companies that are the best investments.
  6. Fundamental Analysis

    The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  7. Fundamental Analysis

    Catch On To The CCAPM

    The consumption capital asset pricing model smoothes over some of CAPM's weaknesses to make sense of risk aversion.
  8. Home & Auto

    Remodeling The Housing Finance Industry

    The meltdown in mortgage-backed securities is bringing about reform in home financing.
  9. Forex Education

    Reduce Your Risk With ICAPM

    Avoid unnecesary risks involved in CAPM calculations by also incorporating ICAPM into the mix.
  10. Active Trading

    The Fed Model And Stock Valuation: What It Does And Does Not Tell Us

    Learn about this popular stock market valuation model and how accurate it has been over the years.

You May Also Like

Hot Definitions
  1. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  2. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  3. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  4. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  5. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
Trading Center