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Globally evolutionarily stable portfolio rules

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  • Evstigneev, Igor V.
  • Hens, Thorsten
  • Schenk-Hoppé, Klaus Reiner

Abstract

The paper examines a dynamic model of a financial market with endogenous asset prices determined by short-run equilibrium of supply and demand. Assets pay dividends that are partially consumed and partially reinvested. The traders use fixed-mix investment strategies (portfolio rules), distributing their wealth between assets in fixed proportions. Our main goal is to identify globally evolutionarily stable strategies, allowing an investor to "survive," i.e., to accumulate in the long run a positive share of market wealth, regardless of the initial state of the market. It is shown that there is a unique portfolio rule with this property--an analogue of the famous Kelly rule of "betting your beliefs." A game theoretic interpretation of this result is given.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 140 (2008)
Issue (Month): 1 (May)
Pages: 197-228

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Handle: RePEc:eee:jetheo:v:140:y:2008:i:1:p:197-228

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  1. Carlos Alós-Ferrer & Ana B. Ania, 2003. "The Asset Market Game," Vienna Economics Papers 0320, University of Vienna, Department of Economics.
  2. Igor Evstigneev & Thorsten Hens & Klaus Schenk-Hoppé, 2006. "Evolutionary stable stock markets," Economic Theory, Springer, vol. 27(2), pages 449-468, January.
  3. repec:att:wimass:9725 is not listed on IDEAS
  4. Schlicht, Ekkehart, . "Isolation and Aggregation in Economics," Monographs in Economics, University of Munich, Department of Economics, number 3, April.
  5. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October.
  6. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1487-1516, September.
  7. Rabah Amir & Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Market Selection and Survival of Investment Strategies," IEW - Working Papers 091, Institute for Empirical Research in Economics - University of Zurich.
  8. W. Brian Arthur & John H. Holland & Blake LeBaron & Richard Palmer & Paul Taylor, 1996. "Asset Pricing Under Endogenous Expectation in an Artificial Stock Market," Working Papers 96-12-093, Santa Fe Institute.
  9. Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Market Selection of Financial Trading Strategies: Global Stability," IEW - Working Papers 083, Institute for Empirical Research in Economics - University of Zurich.
  10. J. Doyne Farmer & Andrew W. Lo, 1999. "Frontiers of Finance: Evolution and Efficient Markets," Working Papers 99-06-039, Santa Fe Institute.
  11. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  12. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  13. Jean-Jacques Laffont, 1989. "The Economics of Uncertainty and Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121360, December.
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Citations

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Cited by:
  1. Palczewski, Jan & Schenk-Hoppé, Klaus Reiner, 2010. "From discrete to continuous time evolutionary finance models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 913-931, May.
  2. Anufriev, M. & Bottazzi, G., 2009. "Market Equilibria under Procedural Rationality (revised version of WP 06-02)," CeNDEF Working Papers 09-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Giulio Bottazzi & Pietro Dindo, 2011. "Selection in asset markets: the good, the bad, and the unknown," LEM Papers Series 2011/11, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  4. Thorsten Hens & Terje Lensberg & Klaus Schenk-Hoppé & Peter Wöhrmann, 2011. "An evolutionary explanation of the value premium puzzle," Journal of Evolutionary Economics, Springer, vol. 21(5), pages 803-815, December.
  5. Igor V. EVSTIGNEEVY & Thorsten HENS & Klaus Reiner SCHENK-HOPPE, . "An evolutionary financial market model with a risk-free asset," Swiss Finance Institute Research Paper Series 10-36, Swiss Finance Institute.
  6. Jan PALCZEWSKI & Klaus Reiner SCHENK-HOPPE, 2008. "Market Selection of Constant Proportions Investment Strategies in Continuous Time," Swiss Finance Institute Research Paper Series 08-29, Swiss Finance Institute.
  7. Blake LeBaron, 2010. "Wealth Dynamics and a Bias Toward Momentum Trading," Working Papers 14, Brandeis University, Department of Economics and International Businesss School.
  8. W. Bahsoun & I. Evstigneev & L. Xu, 2011. "Almost sure Nash equilibrium strategies in evolutionary models of asset markets," Computational Statistics, Springer, vol. 73(2), pages 235-250, April.
  9. Anufriev, Mikhail & Bottazzi, Giulio, 2010. "Market equilibria under procedural rationality," Journal of Mathematical Economics, Elsevier, vol. 46(6), pages 1140-1172, November.

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