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The instantaneous capital market line

Economic Theory volume 28, pages 651–664 (2006)Cite this article

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Summary.

We show that if the intercept and slope of the instantaneous capital market line are deterministic, then investors will not hold any hedge portfolios in the sense of Merton [9, 11]. They will choose portfolios that plot on the capital market line, and they will slide up and down the capital market line over time as their wealth and risk tolerance change. This result allows us to aggregate over investors and derive a single factor CAPM where the first and second moments of security returns may change stochastically over time and markets are potentially incomplete.

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Author information

Authors and Affiliations

  1. Oak Hill Platinum Partners, 1100 King Street, Building Four, NY 10573, Rye Brook, USA

    Lars Tyge Nielsen

  2. Columbia University, Graduate School of Business, 3022 Broadway, NY 10027, New York, USA

    Maria Vassalou

Authors
  1. Lars Tyge Nielsen
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  2. Maria Vassalou
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Corresponding author

Correspondence to Lars Tyge Nielsen.

Additional information

Received: 21 June 2004, Revised: 10 December 2004,

JEL Classification Numbers:

G11, G12.

An earlier version of this paper was presented at the Econometric Society Meeting in Pasadena (1997) under the title “Portfolio selection and asset pricing with dynamically incomplete markets and time-varying first and second moments”.

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Cite this article

Nielsen, L.T., Vassalou, M. The instantaneous capital market line. Economic Theory 28, 651–664 (2006). https://doi.org/10.1007/s00199-005-0638-1

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  • DOI: https://doi.org/10.1007/s00199-005-0638-1

Keywords and Phrases:

  • Portfolio optimization
  • Incomplete markets
  • Capital market line
  • Mutual fund separation.