ICAPM

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The Intertemporal Capital Asset Pricing Model, or ICAPM, is a linear factor model with wealth and state variable that forecast changes in the distribution of future returns or income.

The main difference between ICAPM and standard CAPM is additing state variables that acknowledge the fact that investors hedge against shortfalls in consumption or against changes in the future investment opportunity set.

References:

  • "An Intertemporal Capital Asset Pricing Model", by R.C. Merton (Econometrica, 41, 867-887, 1973)
  • "Multifactor Portfolio Efficiency and Multifactor Asset Pricing" by Eugene F. Fama, (The Journal of Financial and Quantitative Analysis), Vol. 31, No. 4, Dec., 1996


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