Evolutionary Stable Stock Markets
This paper shows that a stock market is evolutionary stable if and only if stocks are evaluated by expected relative dividends. Any other market can be invaded by portfolio rules that will gain market wealth and hence change the valuation. In the model the valuation of assets is given by the wealth average of the portfolio rules in the market. The wealth dynamics is modelled as a random dynamical system. Necessary and sufficient conditions are derived for the evolutionary stability of portfolio rules when (relative) dividend payoffs form a stationary Markov process. These local stability conditions lead to a unique evolutionary stable strategy according to which assets are evaluated by expected relative dividends.
|Date of creation:||Oct 2003|
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- Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2008. "Evolutionary Finance," Swiss Finance Institute Research Paper Series 08-14, Swiss Finance Institute.
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- Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2002. "Market Selection Of Financial Trading Strategies: Global Stability," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 329-339.
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"If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets,"
01-06-031, Santa Fe Institute.
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- Larry Blume & David Easley, 2001. "If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Cowles Foundation Discussion Papers 1319, Cowles Foundation for Research in Economics, Yale University.
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"Noise Trader Risk in Financial Markets,"
3725552, Harvard University Department of Economics.
- Luenberger, David G., 1997. "Investment Science," OUP Catalogue, Oxford University Press, number 9780195108095, December.
- Klaus Reiner Schenk-Hoppï¿½, . "Random Dynamical Systems in Economics," IEW - Working Papers 067, Institute for Empirical Research in Economics - University of Zurich.
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