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.
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.:
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.
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