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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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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0320.pdf
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Bibliographic Info

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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Web page: http://www.univie.ac.at/vwl

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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

This paper has been announced in the following NEP Reports:

• NEP-ALL-2004-01-12 (All new papers)
• NEP-CFN-2004-01-12 (Corporate Finance)

References

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    • 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.
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16. Martin Shubik, 1972. "A Theory of Money and Financial Institutions. Part IV. Fiat Money and Noncooperative Equilibrium in a Closed Economy," Cowles Foundation Discussion Papers 330, Cowles Foundation for Research in Economics, Yale University.
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Citations

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Cited by:

1. Cherkashin, Dmitriy & Farmer, J. Doyne & Lloyd, Seth, 2009. "The reality game," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1091-1105, May.
   
   • Dmitriy Cherkashin & J. Doyne Farmer & Seth Lloyd, 2009. "The Reality Game," Papers 0902.0100, arXiv.org, revised Feb 2009.
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.
3. Thorsten Hens & Stefan Reimann & Bodo Vogt, . "Competitive Nash Equilibria and Two Period Fund Separation," IEW - Working Papers 172, Institute for Empirical Research in Economics - University of Zurich.
4. Hens, Thorsten & Schenk-Hoppe, Klaus Reiner, 2005. "Evolutionary finance: introduction to the special issue," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 1-5, February.
5. Gehrig, Thomas & Güth, Werner & Leví0nský, René & Popova, Vera, 2010. "On the evolution of professional consulting," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 113-126, October.
6. Evstigneev, Igor V. & Hens, Thorsten & Schenk-Hoppé, Klaus Reiner, 2008. "Globally evolutionarily stable portfolio rules," Journal of Economic Theory, Elsevier, vol. 140(1), pages 197-228, May.
   
   • Evstigneev, Igor V. & Hens, Thorsten & Schenk-Hoppé, Klaus Reiner, 2005. "Globally Evolutionarily Stable Portfolio Rules," Discussion Papers 2005/17, Department of Finance and Management Science, Norwegian School of Economics.
7. Manfred Nermuth, 2011. "Competing in Several Areas Simultaneously: The Case of Strategic Asset Markets," Games, MDPI, Open Access Journal, vol. 2(2), pages 209-234, April.
8. Hehenkamp, Burkhard & Possajennikov, Alex & Guse, Tobias, 2010. "On the equivalence of Nash and evolutionary equilibrium in finite populations," Journal of Economic Behavior & Organization, Elsevier, vol. 73(2), pages 254-258, February.
   
   • Tobias Guse & Burkhard Hehenkamp & Alex Possajennikov, 2008. "On the Equivalence of Nash and Evolutionary Equilibrium in Finite Populations," Discussion Papers 2008-06, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.

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