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Evolutionary stable stock markets

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Author Info
Igor Evstigneev ()
Thorsten Hens ()
Klaus Schenk-Hoppé ()

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Abstract

This paper shows that a stock market is evolutionary stable if and only if stocks are evaluated by expected relative dividends. Any other market can be invaded in the sense that there is a portfolio rule that, when introduced on the market with arbitrarily small initial wealth, increases its market share at the incumbent’s expense. This mutant portfolio rule changes the asset valuation in the course of time. The stochastic wealth dynamics in our evolutionary stock market model is formulated as a random dynamical system. Applying this theory, necessary and sufficient conditions are derived for the evolutionary stability of portfolio rules when relative dividend payoffs follow a stationary Markov process. These local stability conditions lead to a unique evolutionary stable portfolio rule according to which assets are evaluated by expected relative dividends (with respect to the objective probabilities). Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s00199-005-0607-8
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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 27 (2006)
Issue (Month): 2 (January)
Pages: 449-468
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Handle: RePEc:spr:joecth:v:27:y:2006:i:2:p:449-468

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Keywords: Evolutionary finance; Portfolio theory; Incomplete markets.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Thorsten Hens & Klaus Reiner Schenk-Hoppé & Martin Stalder, 2002. "An Application of Evolutionary Finance to Firms Listed in the Swiss Market Index," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 465-487, December. [Downloadable!]
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  2. Fehr, Ernst & Fischbacher, Urs & von Rosenbladt, Bernhard & Schupp, Jürgen & Wagner, Gert G., 2003. "A Nation-Wide Laboratory: Examining Trust and Trustworthiness by Integrating Behavioral Experiments into Representative Surveys," IZA Discussion Papers 715, Institute for the Study of Labor (IZA). [Downloadable!]
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  3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  4. Igor Evstigneev & Thorsten Hens & Klaus Schenk-Hoppé, 2006. "Evolutionary stable stock markets," Economic Theory, Springer, vol. 27(2), pages 449-468, January. [Downloadable!] (restricted)
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  5. Alois Stutzer & Bruno S. Frey, . "Stress That Doesn't Pay: The Commuting Paradox," IEW - Working Papers iewwp151, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  6. Foellmi, Reto & Zweimuller, Josef, 2004. "Inequality, market power, and product diversity," Economics Letters, Elsevier, vol. 82(1), pages 139-145, January. [Downloadable!] (restricted)
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  7. Aleksander Berentsen & Esther Brügger & Simon Lörtscher, 2003. "On Cheating and Whistle-Blowing," Diskussionsschriften dp0302, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
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  8. 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. [Downloadable!] (restricted)
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  12. Bruno S. Frey & Alois Stutzer, . "Testing Theories of Happiness," IEW - Working Papers iewwp147, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  13. Urs Fischbacher & Christina M. Fong & Ernst Fehr, . "Fairness, Errors and the Power of Competition," IEW - Working Papers iewwp133, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  14. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June. [Downloadable!] (restricted)
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  15. Bruno S. Frey & Stephan Meier, . "The Economics of Museums," IEW - Working Papers iewwp149, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  16. Larry Blume & David Easley, 2001. "If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Cowles Foundation Discussion Papers 1319, Cowles Foundation, Yale University. [Downloadable!]
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  17. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  18. Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Market Selection of Financial Trading Strategies: Global Stability," IEW - Working Papers iewwp083, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  21. Foellmi, Reto & Oechslin, Manuel, 2007. "Who gains from non-collusive corruption?," Journal of Development Economics, Elsevier, vol. 82(1), pages 95-119, January. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bruno S. Frey & Simon Luechinger & Alois Stutzer, . "Calculating Tragedy: Assessing the Costs of Terrorism," IEW - Working Papers iewwp205, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  2. Enrico De Giorgi & Stefan Reimann, . "The ?-Beauty Contest: Choosing Numbers, Thinking Intervals," IEW - Working Papers iewwp183, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  3. Thorsten Hens & P. Jean-Jacques Herings & Arkadi Predtetchinskii, . "Limits to Arbitrage when Market Participation Is Restricted," IEW - Working Papers iewwp176, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  4. Bruno S. Frey & Alois Stutzer, . "Making International Organizations More Democratic," IEW - Working Papers iewwp217, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  5. Lensberg, Terje & Schenk-Hoppé, Klaus Reiner, 2006. "On the Evolution of Investment Strategies and the Kelly Rule – A Darwinian Approach," Discussion Papers 2006/23, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
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  6. Ernst Fehr & Klaus M. Schmidt, . "The Role of Equality, Efficiency, and Rawlsian Motives in Social Preferences: A Reply to Engelmann and Strobel," IEW - Working Papers iewwp179, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  7. Matthias Benz & Bruno S. Frey, . "The Value of Autonomy: Evidence from the Self-Employed in 23 Countries," IEW - Working Papers iewwp173, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  8. Patrick Leoni, . "Learning in Repeated Games without Repeating the Game," IEW - Working Papers iewwp215, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  9. Steffen Huck & Michael Kosfeld, . "The Dynamics of Neighbourhood Watch and Norm Enforcement," IEW - Working Papers iewwp199, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  10. Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2004. "Survival of the Fittest on Wall Street," Discussion Papers 04-03, University of Copenhagen. Department of Economics. [Downloadable!]
  11. Igor Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Evolutionary Stable Stock Markets," IEW - Working Papers iewwp170, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  12. Ernst Fehr & Susanne Kremhelmer & Klaus M. Schmidt, . "Fairness and the Optimal Allocation of Ownership Rights," IEW - Working Papers iewwp224, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  13. Enrico De Giorgi, . "Evolutionary Portfolio Selection with Liquidity Shocks," IEW - Working Papers iewwp185, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  14. Bruno S. Frey, . "Happiness Research: State and Prospects," IEW - Working Papers iewwp192, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  15. Aleksander Berentsen & Esther Bruegger & Simon Loertscher, . "Heterogeneity, Local Information, and Global Interaction," IEW - Working Papers iewwp182, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  16. Evstigneev, Igor V. & Hens, Thorsten & Schenk-Hoppé, Klaus Reiner, 2005. "Globally Evolutionarily Stable Portfolio Rules," Discussion Papers 2005/17, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
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  17. Pavlo Blavatskyy, . "Why the Olympics have three prizes and not just one," IEW - Working Papers iewwp200, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  18. Philipp C. Wichardt, . "An Application of Global Games to Signalling Models," IEW - Working Papers iewwp223, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  19. Gerber, Anke & Hens, Thorsten & Woehrmann, Peter, 2005. "Dynamic General Equilibrium and T-Period Fund Separation," Discussion Papers 2005/16, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
  20. Bruno S. Frey & Margit Osterloh, . "Yes, Managers Should be Paid Like Bureaucrats," IEW - Working Papers iewwp187, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  21. Peter Woehrmann, . "A dynamic model of the financial–real interaction as a model selection criterion for nonparametric stock market prediction," IEW - Working Papers iewwp226, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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