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Behavioral Heterogeneity in the CAPM with Evolutionary Dynamics

Author

Listed:
  • Thorsten Hens

    (University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute)

  • Fatemeh Naebi

    (Allameh Tabataba'i University, Department of Theoretical Economics)

Abstract

The paper shows how the standard two-period CAPM with exogenous wealth and exogenous returns can be extended inter-temporally by including the evolution of wealth from the Evolutionary Finance model of Evstigneev, Hens and Schenk-Hoppe (2011). The missing link between the two models is given by the CAPM with heterogeneous behavior derived by Hens and Naebi (2020). This paper delivers theoretical and empirical results for behavioral heterogeneity in the CAPM with evolutionary dynamics. As a result of the market selection process, we derive a beta based on fundamentals to which the standard beta tends to converge asymptotically. This is confirmed by data from the DJIA.

Suggested Citation

  • Thorsten Hens & Fatemeh Naebi, 2022. "Behavioral Heterogeneity in the CAPM with Evolutionary Dynamics," Swiss Finance Institute Research Paper Series 22-06, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2206
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4003071
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    Cited by:

    1. I. V. Evstigneev & T. Hens & M. J. Vanaei, 2023. "Evolutionary finance: a model with endogenous asset payoffs," Journal of Bioeconomics, Springer, vol. 25(2), pages 117-143, August.

    More about this item

    Keywords

    CAPM; Heterogeneous Behavior; Evolutionary Dynamics; Fundamental Beta;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G1 - Financial Economics - - General Financial Markets
    • G4 - Financial Economics - - Behavioral Finance

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