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The Evolution of Portfolio Rules and the Capital Asset Pricing Model

  • Sciubba, E.

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://www.econ.cam.ac.uk/research/repec/cam/pdf/wp9909.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9909.

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Date of creation: Jun 1999
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Handle: RePEc:cam:camdae:9909
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  7. Emanuela Sciubba, 2006. "The evolution of portfolio rules and the capital asset pricing model," Economic Theory, Springer, vol. 29(1), pages 123-150, September.
  8. Blume, Lawrence E. & Easley, David, 1993. "Economic natural selection," Economics Letters, Elsevier, vol. 42(2-3), pages 281-289.
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  13. Witt, Ulrich, 1986. "Firms' market behavior under imperfect information and economic natural selection," Journal of Economic Behavior & Organization, Elsevier, vol. 7(3), pages 265-290, September.
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  18. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  19. Biais, Bruno & Shadur, Raphaël, 1994. "On the Survival of Irrational Traders: A Darwinian Approach," IDEI Working Papers 32, Institut d'Économie Industrielle (IDEI), Toulouse.
  20. Hakansson, Nils H, 1971. "Multi-Period Mean-Variance Analysis: Toward A General Theory of Portfolio Choice," Journal of Finance, American Finance Association, vol. 26(4), pages 857-84, September.
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