A Mean-Variance Benchmark for Intertemporal Portfolio Theory

53 Pages Posted: 2 Feb 2013 Last revised: 13 Oct 2024

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

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Date Written: February 2013

Abstract

Mean-variance portfolio theory can apply to the streams of payoffs such as dividends following an initial investment, in place of one-period returns. This description is especially useful when returns are not independent over time and investors have non-marketed income. Investors hedge their outside income streams, and then their optimal payoff is split between an indexed perpetuity - the risk-free payoff - and a long-run mean-variance efficient payoff. "Long-run" moments sum over time as well as states of nature. In equilibrium, long-run expected returns vary with long-run market betas and outside- income betas. State-variable hedges do not appear in optimal payoffs or this equilibrium.

Suggested Citation

Cochrane, John H., A Mean-Variance Benchmark for Intertemporal Portfolio Theory (February 2013). NBER Working Paper No. w18768, Available at SSRN: https://ssrn.com/abstract=2210787

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