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Evolutionary Stable Stock Markets

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  • Igor Evstigneev
  • Thorsten Hens
  • Klaus Reiner Schenk-Hopp�

Abstract

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.

Suggested Citation

  • Igor Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hopp�, "undated". "Evolutionary Stable Stock Markets," IEW - Working Papers 170, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:170
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    File URL: https://www.zora.uzh.ch/id/eprint/52066/1/iewwp170.pdf
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    References listed on IDEAS

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    1. Murata, Yasuo, 1977. "Mathematics for Stability and Optimization of Economic Systems," Elsevier Monographs, Elsevier, edition 1, number 9780125112505 edited by Shell, Karl.
    2. Klaus Reiner Schenk-Hopp�, "undated". "Random Dynamical Systems in Economics," IEW - Working Papers 067, Institute for Empirical Research in Economics - University of Zurich.
    3. Thorsten Hens & Klaus Reiner Schenk-Hoppé & Martin Stalder, 2002. "An Application of Evolutionary Finance to Firms Listed in the Swiss Market Index," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 465-487, December.
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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