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Survival of the Fittest on Wall Street

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Author Info

  • Thorsten Hens

    (University of Zurich)

  • Klaus Reiner Schenk-Hoppé

    (Institute of Economics, University of Copenhagen)

Abstract

This paper studies an application of a Darwinian theory of portfolio selection to stocks listed in the Dow Jones Industrial Average (DJIA). We analyze numerically the long-run outcome of the competition of fix-mix portfolio rules in a stock market with actual DJIA dividends. In the model seemingly rational strategies can do very poorly against seemingly irrational strategies. Moreover, the interaction of strategies can lead to stochastic time series of asset prices that do not converge. The simulations also show that the evolutionary portfolio rule discovered in Hens and Schenk-Hopp´e (2004) will eventually hold total market wealth in competition with fix-mix portfolio rules derived from mean-variance optimization, maximum growth theory and behavioral finance. According to this evolutionary rule, portfolio weights should be proportional to the expected relative dividends of the assets. As an implication asset prices converge to expected relative dividends.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/2004/0403.pdf/
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 04-03.

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Length: 28 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:kud:kuiedp:0403

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Related research

Keywords: Evolutionary Finance; Behavioral Finance; CAPM; Fix-Mix Portfolio Rules; Growth Optimal Portfolio;

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  1. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
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