NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Mean-Variance Benchmark for Intertemporal Portfolio Theory

John H. Cochrane

NBER Working Paper No. 18768
Issued in February 2013
NBER Program(s):   AP

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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