Survival of the Fittest on Wall Street
AbstractThis 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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Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 04-03.
Length: 28 pages
Date of creation: Feb 2004
Date of revision:
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More information through EDIRC
Evolutionary Finance; Behavioral Finance; CAPM; Fix-Mix Portfolio Rules; Growth Optimal Portfolio;
Find related papers by JEL classification:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-15 (All new papers)
- NEP-CBE-2004-02-15 (Cognitive & Behavioural Economics)
- NEP-CMP-2004-02-15 (Computational Economics)
- NEP-FMK-2004-02-15 (Financial Markets)
- NEP-MIC-2004-02-15 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990.
"Noise Trader Risk in Financial Markets,"
3725552, Harvard University Department of Economics.
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