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A Mean-Variance Benchmark for Intertemporal Portfolio Theory

  • John H. Cochrane

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18768.

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Date of creation: Feb 2013
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Publication status: published as John H. Cochrane, 2014. "A Mean-Variance Benchmark for Intertemporal Portfolio Theory," Journal of Finance, American Finance Association, vol. 69(1), pages 1-49, 02.
Handle: RePEc:nbr:nberwo:18768
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