Behavioral Heterogeneity in the CAPM with Evolutionary Dynamics

Thorsten Hens and Fatemeh Naebi
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Thorsten Hens: University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute
Fatemeh Naebi: Allameh Tabataba'i University, Department of Theoretical Economics

No 22-06, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The paper shows how the standard two-period CAPM with exogenous wealth and exogenous returns can be extended inter-temporally by including the evolution of wealth from the Evolutionary Finance model of Evstigneev, Hens and Schenk-Hoppe (2011). The missing link between the two models is given by the CAPM with heterogeneous behavior derived by Hens and Naebi (2020). This paper delivers theoretical and empirical results for behavioral heterogeneity in the CAPM with evolutionary dynamics. As a result of the market selection process, we derive a beta based on fundamentals to which the standard beta tends to converge asymptotically. This is confirmed by data from the DJIA.

Keywords: CAPM; Heterogeneous Behavior; Evolutionary Dynamics; Fundamental Beta (search for similar items in EconPapers)
JEL-codes: D53 G1 G4 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2022-01
New Economics Papers: this item is included in nep-evo and nep-ore
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2206

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