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Market Selection and Survival of Investment Strategies

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Author Info

  • Rabah Amir

    (Center for Operations Research and Econometrics (CORE), Université Catholique de Louvain)

  • Igor V. Evstigneev

    (School of Economic Studies, University of Manchester)

  • Thorsten Hens

    (Institute for Empirical Research in Economics, University of Zürich)

  • Klaus Reiner Schenk-Hoppé

    (Institute of Economics, University of Copenhagen)

Abstract

The paper analyzes the process of market selection of investment strategies in an incomplete market of short-lived assets. In the model understudy, asset payoffs depend on exogenous random factors. Market participants use dynamic investment strategies taking account of available information about current and previous events. It is shown that an investor allocating wealth across the assets according to their conditional expected payoffs eventually accumulates total market wealth, provided the investor' s strategy is asymptotically distinct from the portfolio rule suggested by the Capital Asset Pricing Model. This assumption turns out to be essentially necessary for the result.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 02-16.

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Length: 22 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:kud:kuiedp:0216

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Related research

Keywords: evolutionary finance; portfolio theory; CAPM; investment strategies; market selection; incomplete markets;

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References

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  1. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2001. "Evolutionary Dynamics in Financial Markets With Many Trader Types," CeNDEF Working Papers 01-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  2. Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2003. "Evolutionary Stability of Portfolio Rules in Incomplete Markets," Discussion Papers 03-03, University of Copenhagen. Department of Economics.
  3. Lawrence Blume & David Easley, 2006. "If You're so Smart, why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Econometrica, Econometric Society, vol. 74(4), pages 929-966, 07.
  4. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  5. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  6. 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.
  7. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  8. Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2002. "Market Selection Of Financial Trading Strategies: Global Stability," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 329-339.
  9. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  10. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
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