Intertemporal Capital Asset Pricing Model - ICAPM

Filed Under: ,
Dictionary Says

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 Says

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.

comments powered by Disqus
Hot Definitions
  1. Legal Monopoly

    A company that is operating as a monopoly under a government mandate. A legal monopoly offers a specific product or service at a regulated price and can either be independently run and government regulated, or government run and regulated.
  2. Closed-End Fund

    A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
  3. Payday Loan

    A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash.
  4. Securitization

    The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors.
  5. Economic Forecasting

    The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators.
  6. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and agricultural products.
Trading Center