Intertemporal CAPM

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In mathematical finance, the intertemporal capital asset pricing model, or ICAPM, created by Robert C. Merton,^[1] is an alternative to the Capital Asset Pricing Model (CAPM). It is a linear factor model with wealth as state variable that forecasts changes in the distribution of future returns or income.

In the ICAPM investors are solving lifetime consumption decisions when faced with more than one uncertainty. The main difference between ICAPM and standard CAPM is the additional state variables that acknowledge the fact that investors hedge against shortfalls in consumption or against changes in the future investment opportunity set.