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An evolutionary financial market model with a risk-free asset

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  • Igor V. EVSTIGNEEVY

    (University of Manchester)

  • Thorsten HENS

    (University of Zurich and Swiss Finance Institute)

  • Klaus Reiner SCHENK-HOPPE

    (University of Leeds)

Abstract

This paper introduces and analyzes an evolutionary model of a financial market with a risk-free asset. We focus on the local stability of the wealth dynamics, applying recent results on the linearization and stability of random dynamical systems (Evstigneev, Pirogov and Schenk-Hoppé (Proceedings of the American Mathematical Society, forthcoming). Our results give conditions on the linearization of the model at an equilibrium state, ensuring local convergence of sample paths to this equilibrium. The concept of local stability is closely related to the notion of evolutionary stability. A locally evolutionarily stable investment strategy is derived.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 10-36.

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Length: 27 pages
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Handle: RePEc:chf:rpseri:rp1036

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Web page: http://www.SwissFinanceInstitute.ch
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Related research

Keywords: Evolutionary finance; risk-free asset; local stability.;

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  1. Evstigneev, Igor V. & Hens, Thorsten & Schenk-Hoppé, Klaus Reiner, 2005. "Globally Evolutionarily Stable Portfolio Rules," Discussion Papers 2005/17, Department of Business and Management Science, Norwegian School of Economics.
  2. Thorsten Hens & Klaus Reiner Schenk-Hoppé & Martin Stalder, . "An Application of Evolutionary Finance to Firms Listed in the Swiss Market Index," IEW - Working Papers 128, Institute for Empirical Research in Economics - University of Zurich.
  3. Chiarella, Carl & He, Xue-Zhong & Zheng, Min, 2011. "An analysis of the effect of noise in a heterogeneous agent financial market model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 148-162, January.
  4. Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Markets Do Not Select For a Liquidity Preference as Behavior Towards Risk," IEW - Working Papers 139, Institute for Empirical Research in Economics - University of Zurich.
  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. Anufriev, Mikhail & Dindo, Pietro, 2010. "Wealth-driven selection in a financial market with heterogeneous agents," Journal of Economic Behavior & Organization, Elsevier, vol. 73(3), pages 327-358, March.
  7. Daniel Kuhn & David Luenberger, 2010. "Analysis of the rebalancing frequency in log-optimal portfolio selection," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 221-234.
  8. 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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