Evolutionary stable stock markets

Igor Evstigneev (), Thorsten Hens () and Klaus Reiner Schenk-Hoppé ()

Economic Theory, 2006, vol. 27, issue 2, pages 449-468

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 in the sense that there is a portfolio rule that, when introduced on the market with arbitrarily small initial wealth, increases its market share at the incumbent’s expense. This mutant portfolio rule changes the asset valuation in the course of time. The stochastic wealth dynamics in our evolutionary stock market model is formulated as a random dynamical system. Applying this theory, necessary and sufficient conditions are derived for the evolutionary stability of portfolio rules when relative dividend payoffs follow a stationary Markov process. These local stability conditions lead to a unique evolutionary stable portfolio rule according to which assets are evaluated by expected relative dividends (with respect to the objective probabilities). Copyright Springer-Verlag Berlin/Heidelberg 2006

Keywords: Evolutionary finance; Portfolio theory; Incomplete markets. (search for similar items in EconPapers)
Date: 2006
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Related works:
Working Paper: Evolutionary Stable Stock Markets
Working Paper: Evolutionary Stable Stock Markets (2003)
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