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The Evolution of Portfolio Rules and the Capital Asset Pricing Model

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  • Sciubba, E.

Abstract

The aim of this paper is to test the performance of the standard version of CAPM in an evolutionary framework. We imagine a heterogeneous population of long-lived agents who invest their wealth according to differential porfolio rules and ask what is the fate of those who happen to behave as prescribed by CAPM. In a complete securities market with aggregate uncertainty, it is shown that traders who either believe' in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, under some very weak conditions, vanish in the long run. A sufficient condition to drive CAPM or mean-variance traders' wealth shares to zero is shown to be that an investor endowed with a logarithmic utility function enters the market. Finally, the robustness of the results is checked, allowing for different kinds of heterogeneity among traders.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9909.

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Date of creation: Jun 1999
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Handle: RePEc:cam:camdae:9909

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Keywords: Evolution; Portfolio rules; CAPM; Kelly criterion;

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Citations

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Cited by:
  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), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 465-487, December.
  2. Emanuela Sciubba, 2005. "Asymmetric information and survival in financial markets," Economic Theory, Springer, Springer, vol. 25(2), pages 353-379, 02.
  3. G. Caldarelli & M. Piccioni & E. Sciubba, 2000. "A Numerical Study on the Evolution of Portfolio Rules: Is CAPM Fit for Nasdaq?," Papers cond-mat/0009437, arXiv.org.
  4. Hens, Thorsten & Schenk-Hoppe, Klaus Reiner, 2005. "Evolutionary stability of portfolio rules in incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 43-66, February.
  5. Tarek Coury & Emanuela Sciubba, 2012. "Belief heterogeneity and survival in incomplete markets," Economic Theory, Springer, Springer, vol. 49(1), pages 37-58, January.
  6. Chen, Shu-Heng & Huang, Ya-Chi, 2008. "Risk preference, forecasting accuracy and survival dynamics: Simulations based on a multi-asset agent-based artificial stock market," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 67(3-4), pages 702-717, September.
  7. Emanuela Sciubba, 2006. "The evolution of portfolio rules and the capital asset pricing model," Economic Theory, Springer, Springer, vol. 29(1), pages 123-150, September.
  8. Guido Caldarelli & M. Piccioni & E. Sciubba, 2000. "A Numerical Study On The Evolution Of Portfolio Rules," Computing in Economics and Finance 2000, Society for Computational Economics 334, Society for Computational Economics.

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