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The Asset Market Game

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Author Info
Carlos Alós-Ferrer ()
Ana B. Ania ()

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Abstract

This paper models asset markets as a game where assets pay according to an arbitrary payoff matrix,investors decide on fractions of wealth to allocate to each asset,and prices result from market clearing. The only pure-strategy Nash equilibrium is to split wealth proportionally to the assets´expected returns, which can be interpreted as investing according to the fundamentals. Further, the equilibrium is evolutionarily stable in the sense of Schaffer (1988). We also study the stability properties of the equilibrium in an evolutionary dynamics where wealth flows with higher probability into those strategies that obtain higher realized payoffs.

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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0320.

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Date of creation: Dec 2003
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Handle: RePEc:vie:viennp:0320

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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References listed on IDEAS
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.:
  1. 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. [Downloadable!] (restricted)
  2. Ana B. Ania, 2000. "Learning by Imitation when Playing the Field," Vienna Economics Papers 0005, University of Vienna, Department of Economics. [Downloadable!]
  3. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October. [Downloadable!] (restricted)
  4. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May. [Downloadable!] (restricted)
  5. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  6. Bjornerstedt, J. & Weibull, J.W., 1993. "Nash Equilibrium and Evolution by Imitation," DELTA Working Papers 93-23, DELTA (Ecole normale supérieure).
  7. Kliger, Doron & Levy, Ori & Sonsino, Doron, 2003. "On absolute and relative performance and the demand for mutual funds--experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 52(3), pages 341-363, November. [Downloadable!] (restricted)
  8. Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February. [Downloadable!] (restricted)
  9. Carlos Alós Ferrer & Ana B. Ania, 2002. "The Evolutionary Logic of Feeling Small," Vienna Economics Papers 0216, University of Vienna, Department of Economics. [Downloadable!]
  10. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October. [Downloadable!] (restricted)
  11. Schlag, Karl H., 1998. "Why Imitate, and If So, How?, : A Boundedly Rational Approach to Multi-armed Bandits," Journal of Economic Theory, Elsevier, vol. 78(1), pages 130-156, January. [Downloadable!] (restricted)
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  12. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January. [Downloadable!] (restricted)
  13. Tanaka, Yasuhito, 2000. "A finite population ESS and a long run equilibrium in an n players coordination game," Mathematical Social Sciences, Elsevier, vol. 39(2), pages 195-206, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Dmitriy Cherkashin & J. Doyne Farmer & Seth Lloyd, 2009. "The Reality Game," Quantitative Finance Papers 0902.0100, arXiv.org, revised Feb 2009. [Downloadable!]
  2. Manfred Nermuth, 2008. "The Structure of Equilibrium in an Asset Market with Variable Supply," Vienna Economics Papers 0804, University of Vienna, Department of Economics. [Downloadable!]
  3. Thorsten Hens & Stefan Reimann & Bodo Vogt, . "Competitive Nash Equilibria and Two Period Fund Separation," IEW - Working Papers iewwp172, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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