Admissible uncertainty in the intertemporal asset pricing model

Abstract We embed the Sharpe-Lintner, two-parameter asset pricing theory in an intertemporal general equilibrium model. The investment opportunity set changes stochastically over time; in general the short-term and long-term interest rates and the distribution of the rate of return of the market portfolio are non-stationary. This non-stationarity, which is admissible in the Sharpe-Lintner model, has two implications: First, it may bias econometric methods which fail to explicitly take into account the non-stationarity. Second, the sequential application of the Sharpe-Lintner model in the discounting of stochastic cash flows becomes computationally complex and of little practical use.

[1]  Mark Rubinstein,et al.  The Valuation of Uncertain Income Streams and the Pricing of Options , 1976 .

[2]  R. C. Merton,et al.  An Analytic Derivation of the Efficient Portfolio Frontier , 1972, Journal of Financial and Quantitative Analysis.

[3]  E. Fama,et al.  Risk, Return, and Equilibrium , 1971, Journal of Political Economy.

[4]  S. Ross.  The arbitrage theory of capital asset pricing , 1976 .

[5]  E. Fama.  Risk-adjusted discount rates and capital budgeting under uncertainty , 1977 .

[6]  F. Black.  Capital Market Equilibrium with Restricted Borrowing , 1972 .

[7]  Mark Rubinstein,et al.  THE STRONG CASE FOR THE GENERALIZED LOGARITHMIC UTILITY MODEL AS THE PREMIER MODEL OF FINANCIAL MARKETS , 1976 .

[8]  J. Mossin.  EQUILIBRIUM IN A CAPITAL ASSET MARKET , 1966 .

[9]  John B. Long,et al.  Stock prices, inflation, and the term structure of interest rates , 1974 .

[10]  J. Mossin.  Optimal multiperiod portfolio policies , 1968 .

[11]  Douglas T. Breeden,et al.  Prices of State-Contingent Claims Implicit in Option Prices , 1978 .

[12]  G. Constantinides.  MARKET RISK ADJUSTMENT IN PROJECT VALUATION , 1978 .

[13]  W. Sharpe.  CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK* , 1964 .

[14]  M. Subrahmanyam,et al.  A Multiperiod Equilibrium Asset Pricing Model , 1978 .

[15]  R. C. Merton,et al.  AN INTERTEMPORAL CAPITAL ASSET PRICING MODEL , 1973 .

[16]  N. H. Hakansson..  ON OPTIMAL MYOPIC PORTFOLIO POLICIES, WITH AND WITHOUT SERIAL CORRELATION OF YIELDS , 1971 .

[17]  J. Lintner.  THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS , 1965 .

[18]  E. Fama.  Multiperiod Consumption-Investment Decisions , 1970 .

[19]  M. C. Jensen.  Capital Markets: Theory and Evidence , 1972 .

[20]  Stephen A. Ross,et al.  Mutual fund separation in financial theory—The separating distributions , 1978 .

[21]  E. Fama,et al.  Tests of the multiperiod two-parameter model , 1974 .

[22]  R. Lucas.  ASSET PRICES IN AN EXCHANGE ECONOMY , 1978 .

[23]  Stephen A. Ross,et al.  THE CURRENT STATUS OF THE CAPITAL ASSET PRICING MODEL (CAPM) , 1978 .

[24]  Richard Roll,et al.  A Critique of the Asset Pricing Theory''s Tests: Part I , 1977 .

[25]  Mark Rubinstein,et al.  An aggregation theorem for securities markets , 1974 .