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A Numerical Study On The Evolution Of Portfolio Rules

Author

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  • Guido Caldarelli

    (Universit la Sapienza)

  • M. Piccioni

    (INFM Sezione di Roma1 Universita' la Sapienza)

  • E. Sciubba

    (Tinbergen Institute Rotterdam)

Abstract

In this paper we test computationally the performance of CAPM in an evolutionary setting. In particular we study the stability of wealth distribution in a financial market where some traders invest as prescribed by CAPM and others behave according to different portfolio rules. Our study is motivated by recent analytical results that show that, whenever a logarithmic utility maximiser enters the market, traders who either "believe" in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, vanish in the long run. Our analysis provides further insights and extends these results. We simulate a sequence of trades in a financial market and: first, we address the issue of how long is the long run in different parametric settings; second, we characterise a portfolio rule that, with some probability, dominates on logarithmic utility maximisers.

Suggested Citation

  • Guido Caldarelli & M. Piccioni & E. Sciubba, 2000. "A Numerical Study On The Evolution Of Portfolio Rules," Computing in Economics and Finance 2000 334, Society for Computational Economics.
    • Handle: RePEc:sce:scecf0:334
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    References listed on IDEAS

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    4. Emanuela Sciubba, 2006. "The evolution of portfolio rules and the capital asset pricing model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(1), pages 123-150, September.
    5. Goldman, M. Barry, 1974. "A negative report on the `near optimality' of the max-expected-log policy as applied to bounded utilities for long lived programs," Journal of Financial Economics, Elsevier, vol. 1(1), pages 97-103, May.
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