The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Intertemporal Portfolio Theory and Asset Pricing

  • Douglas T. Breeden
Reference work entry


The intent of this entry is to present intertemporal portfolio theory and asset pricing models, to explain their results and to illustrate the differences between multiperiod and single-period models. To appreciate intertemporal portfolio theory and asset pricing, it is necessary to understand the state of finance theory prior to the seminal intertemporal works of Merton (1969, 1971, 1973), Samuelson (1969), Fama (1970), Hakansson (1970) and Rubinstein (1974). Section “Single-Period Portfolio Theory and Asset Pricing” presents single-period theory and some general results on portfolio statistics. Section “Intertemporal Portfolio Theory” presents intertemporal portfolio theory. Section “Intertemporal Capital Asset Pricing Model (ICAPM)” presents the intertemporal asset pricing model, and Section “Consumption-Oriented Asset Pricing Model (CCAPM)” presents the consumption-oriented representation of it. Section “Extensions and Conclusions” gives important extensions (without proof) and concludes the entry.

This is a preview of subscription content, log in to check access.


  1. Arrow, K.J. 1951. An extension of the basic theorems of classical welfare economics. In Proceedings of the second Berkeley symposium on mathematical statistics and probability, ed. J. Neyman, 507–531. Berkeley: University of California Press.Google Scholar
  2. Arrow, K.J. 1964a. The role of securities in the optimal allocation of risk-bearing. Review of Economic Studies 31: 91–96.CrossRefGoogle Scholar
  3. Arrow, K.J. 1964b. The theory of risk aversion. In Aspects of the theory of risk-bearing, ed. K.J. Arrow. Helsinki: Yrjö Jahnsson Foundation.Google Scholar
  4. Banz, R.W., and M.H. Miller. 1978. Prices for state-contingent claims: Some estimates and applications. Journal of Business 51: 653–672.CrossRefGoogle Scholar
  5. Beja, A. 1971. The structure of the cost of capital under uncertainty. Review of Economic Studies 38: 359–376.CrossRefGoogle Scholar
  6. Bergman, Y.Z. 1985. Time preference and capital asset pricing models. Journal of Financial Economics 14: 145–160.CrossRefGoogle Scholar
  7. Bhattacharya, S. 1981. Notes on multiperiod valuation and the pricing of options. Journal of Finance 36: 163–180.CrossRefGoogle Scholar
  8. Black, F. 1972. Capital market equilibrium with restricted borrowing. Journal of Business 45: 444–455.CrossRefGoogle Scholar
  9. Black, F., and M.S. Scholes. 1973. The pricing of options and corporate liabilities. Journal of Political Economy 81: 637–654.CrossRefGoogle Scholar
  10. Breeden, D.T. 1979. An intertemporal asset pricing model with stochastic consumption and investment opportunities. Journal of Financial Economics 7: 265–296.CrossRefGoogle Scholar
  11. Breeden, D.T. 1984. Futures markets and commodity options: Hedging and optimality in incomplete markets. Journal of Economic Theory 32: 275–300.CrossRefGoogle Scholar
  12. Breeden, D.T. 1986. Consumption, production, inflation, and interest rates: a synthesis. Journal of Financial Economics 16: 3–39.CrossRefGoogle Scholar
  13. Breeden, D.T., and R.H. Litzenberger. 1978. Prices of state-contingent claims implicit in option prices. Journal of Business 51: 621–651.CrossRefGoogle Scholar
  14. Brennan, M.J. 1979. The pricing of contingent claims in discrete time models. Journal of Finance 34: 53–68.CrossRefGoogle Scholar
  15. Constantanides, G.M. 1982. Intertemporal asset pricing with heterogeneous consumers and without demand aggregation. Journal of Business 55: 253–267.CrossRefGoogle Scholar
  16. Cox, J.C., J.E. Ingersoll, and S.A. Ross. 1985a. A theory of the term structure of interest rates. Econometrica 53: 385–407.CrossRefGoogle Scholar
  17. Cox, J.C., J.E. Ingersoll, and S.A. Ross. 1985b. An intertemporal general equilibrium model of asset prices. Econometrica 53: 385–407.CrossRefGoogle Scholar
  18. Debreu, G. 1959. Theory of value. New York: Wiley.Google Scholar
  19. Dieffenbach, B.C. 1975. A quantitative theory of risk premiums on securities with an application to the term structure of interest rates. Econometrica 43: 431–454.CrossRefGoogle Scholar
  20. Fama, E.F. 1970. Multiperiod consumption-investment decisions. American Economic Review 60: 163–174.Google Scholar
  21. Ferson, W.E. 1983. Expected real interest rates and aggregate consumption: Empirical tests. Journal of Financial and Quantitative Analysis 18: 477–498.CrossRefGoogle Scholar
  22. Fischer, S. 1975. The demand for index bonds. Journal of Political Economy 83: 509–534.CrossRefGoogle Scholar
  23. Garman, M. 1977. A general theory of asset pricing under diffusion state processes. Working Paper No. 50, Research Program in Finance, University of California, Berkeley.Google Scholar
  24. Grauer, F., and R. Litzenberger. 1979. The pricing of commodity futures contracts, nominal bonds and other risky assets under commodity price uncertainty. Journal of Finance 34: 69–83.CrossRefGoogle Scholar
  25. Grossman, S.J., and R.J. Shiller. 1982. Consumption correlatedness and risk measurement in economies with non-traded assets and heterogeneous information. Journal of Financial Economics 10: 195–210.CrossRefGoogle Scholar
  26. Hakansson, N.H. 1970. Optimal investment and consumption strategies under risk for a class of utility functions. Econometrica 38(5): 587–607.CrossRefGoogle Scholar
  27. Hakansson, N.H. 1977. Efficient paths toward efficient capital markets in large and small countries. In Financial decision making under uncertainty, ed. H. Levy and M. Sarnat. New York: Academic.Google Scholar
  28. Hall, R.E. 1978. Stochastic implications of the life cycle-permanent income hypothesis: Theory and evidence. Journal of Political Economy 86: 971–987.CrossRefGoogle Scholar
  29. Hansen, L.P., and K.J. Singleton. 1983. Stochastic consumption, risk aversion, and the temporal behavior of asset returns. Journal of Political Economy 91: 249–265.CrossRefGoogle Scholar
  30. Hirshleifer, J. 1970. Investment, interest and capital. Englewood Cliffs: Prentice-Hall.Google Scholar
  31. Huang, C.-F. 1985. Information structure and equilibrium asset prices. Journal of Economic Theory 34: 33–71.CrossRefGoogle Scholar
  32. Kraus, A., and R.H. Litzenberger. 1975. Market equilibrium in a state preference model with logarithmic utility. Journal of Finance 30(5): 1213–1227.Google Scholar
  33. Kydland, F.E., and E.C. Prescott. 1982. Time to build and aggregate fluctuations. Econometrica 50: 1345–1370.CrossRefGoogle Scholar
  34. Lintner, J. 1965. Valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics 47(February): 13–37.CrossRefGoogle Scholar
  35. Long, J.B. 1974. Stock prices, inflation, and the term structure of interest rates. Journal of Financial Economics 2: 131–170.CrossRefGoogle Scholar
  36. Lucas, R.E. 1978. Asset prices in an exchange economy. Econometrica 46: 14–45.CrossRefGoogle Scholar
  37. Markowitz, H. 1952. Portfolio selection. Journal of Finance 12: 77–91.Google Scholar
  38. Markowitz, H. 1959. Portfolio selection: Efficient diversification of investment. New York: Wiley.Google Scholar
  39. Marsh, T.A., and E.A. Rosenfeld. 1982. Stochastic processes for interest rates and equilibrium bond prices. Journal of Finance 38: 635–646.CrossRefGoogle Scholar
  40. Merton, R.C. 1969. Lifetime portfolio selection under uncertainty: The continuous-time case. Review of Economics and Statistics 51: 247–257.CrossRefGoogle Scholar
  41. Merton, R.C. 1971. Optimum consumption and portfolio rules in a continuous-time model. Journal of Economic Theory 3(4): 373–413.CrossRefGoogle Scholar
  42. Merton, R.C. 1973. An intertemporal capital asset pricing model. Econometrica 41: 867–887.CrossRefGoogle Scholar
  43. Mossin, J. 1966. Equilibrium in a capital asset market. Econometrica 34(October): 768–783.CrossRefGoogle Scholar
  44. Pratt, J.W. 1964. Risk aversion in the small and in the large. Econometrica 32(1–2): 122–136.CrossRefGoogle Scholar
  45. Pye, G. 1972. Lifetime portfolio selection with age dependent risk aversion. In Mathematical methods in investment and finance, ed. G. Szego and K. Shell, 49–64. Amsterdam: North-Holland.Google Scholar
  46. Richard, S.F. 1974. Optimal consumption, portfolio and life insurance rules for an uncertain lived individual in a continuous-time model. Journal of Financial Economics 2: 187–203.CrossRefGoogle Scholar
  47. Roll, R. 1977. A critique of the asset pricing theory’s tests. Part I: On past and potential testability of the theory. Journal of Financial Economics 4: 129–176.CrossRefGoogle Scholar
  48. Ross, S.A. 1976. The arbitrage theory of capital asset pricing. Journal of Economic Theory 3: 343–362.Google Scholar
  49. Rubinstein, M. 1974. A discrete-time synthesis of financial theory. In Research in finance, vol. 3, 53–102. Greenwich: JAI Press.Google Scholar
  50. Rubinstein, M. 1976. The valuation of uncertain income streams and the pricing of options. Bell Journal of Economics and Management Science 7: 407–425.CrossRefGoogle Scholar
  51. Samuelson, P.A. 1969. Lifetime portfolio selection by dynamic stochastic programming. Review of Economics and Statistics 57(3): 239–246.CrossRefGoogle Scholar
  52. Sharpe, W.F. 1964. Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance 19: 429–442.Google Scholar
  53. Stulz, R.M. 1981. A model of international asset pricing. Journal of Financial Economics 9: 383–406.CrossRefGoogle Scholar
  54. Sundaresan, M. 1984. Consumption and equilibrium interest rates in stochastic production economies. Journal of Finance 39: 77–92.CrossRefGoogle Scholar
  55. Tobin, J. 1958. Liquidity preference as behavior towards risk. Review of Economic Studies 25: 65–86.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Douglas T. Breeden
    • 1
  1. 1.