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An Application of Evolutionary Finance to Firms Listed in the Swiss Market Index

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  • Thorsten Hens
  • Klaus Reiner Schenk-Hoppé
  • Martin Stalder

Abstract

This paper presents an application of evolutionary portfolio theory to stocks listed in the Swiss Market Index (SMI). We study numerically the long-run outcome of the competition of rebalancing rules for market shares in a stock market with actual dividends taken from firms listed in the SMI. Returns are endogenous because prices are determined by supply and demand stemming from the rebalancing rules. Our simulations show that in competition with rebalancing rules derived from Mean-Variance Optimization, Maximum Growth Theory and Behavioral Finance, the evolutionary portfolio rule discovered in Hens and Schenk-Hoppé (2001) will eventually hold total market wealth. According to this simple rule the portfolio weights should be proportional to the expected relative dividends of the assets.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 138 (2002)
Issue (Month): IV (December)
Pages: 465-487

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Handle: RePEc:ses:arsjes:2002-iv-9

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Related research

Keywords: Evolutionary Finance; Behavioral Finance; CAPM; Rebalancing Rules; Growth Optimal Portfolio;

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References

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  1. Emanuela Sciubba, 2006. "The evolution of portfolio rules and the capital asset pricing model," Economic Theory, Springer, vol. 29(1), pages 123-150, September.
  2. Hakansson, Nils H, 1970. "Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions," Econometrica, Econometric Society, vol. 38(5), pages 587-607, September.
  3. Arthur, W.B. & LeBaron, B. & Palmer, R., 1997. "Time Series Properties of an Artificial Stock Market," Working papers 9725, Wisconsin Madison - Social Systems.
  4. R Amir & I Evstigneev & T Hens & K R Schenk-Hoppé, 2002. "Market Selection and Survival of Investment Strategies," The School of Economics Discussion Paper Series 0215, Economics, The University of Manchester.
  5. Mark Rubinstein., 1991. "Continuously Rebalanced Investment Strategies," Research Program in Finance Working Papers RPF-205, University of California at Berkeley.
  6. Lawrence Blume & David Easley, 2001. "If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Working Papers 01-06-031, Santa Fe Institute.
  7. Brock, W.A., 1995. "A Rational Route to Randomness," Working papers 9530, Wisconsin Madison - Social Systems.
  8. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  9. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
  10. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
  11. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
  12. 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.
  13. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research.
  14. Thorsten Hens & Klaus Schenk-Hoppé, . "Evolution of Portfolio Rules in Incomplete Markets," IEW - Working Papers 074, Institute for Empirical Research in Economics - University of Zurich.
  15. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  16. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  17. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
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Cited by:
  1. 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.
  2. Bottazzi, Giulio & Dosi, Giovanni & Rebesco, Igor, 2005. "Institutional architectures and behavioral ecologies in the dynamics of financial markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 197-228, February.
  3. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February.

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