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The evolution of portfolio rules and the capital asset pricing model

  • Emanuela Sciubba

    ()

The aim of this paper is to test the performance of the standard version of CAPM in an evolutionary framework. We imagine a heterogeneous population of long-lived agents who invest their wealth according to differential porfolio rules and ask what is the fate of those who happen to behave as prescribed by CAPM. In a complete securities market with aggregate uncertainty, it is shown that traders who either believe' in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, under some very weak conditions, vanish in the long run. A sufficient condition to drive CAPM or mean-variance traders' wealth shares to zero is shown to be that an investor endowed with a logarithmic utility function enters the market. Finally, the robustness of the results is checked, allowing for different kinds of heterogeneity among traders.

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File URL: http://hdl.handle.net/10.1007/s00199-005-0013-2
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 29 (2006)
Issue (Month): 1 (September)
Pages: 123-150

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Handle: RePEc:spr:joecth:v:29:y:2006:i:1:p:123-150
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