Evolution of Portfolio Rules in Incomplete Markets

Thorsten Hens and Klaus Reiner Schenk-Hoppé ()

No iewwp074, IEW - Working Papers from Institute for Empirical Research in Economics - IEW

Abstract: The paper considers the evolution of portfolio rules in markets with stationary returns and endogenous prices. The ultimate success of a portfolio rule is measured by the wealth share the rule is eventually able to conquer in competition with other portfolio rules. We give nec-essary and sufficient conditions for portfolio rules to be evolutionary stable. In the case of i.i.d. returns we identify a simple portfolio rule to be the unique evolutionary stable strategy. Moreover we demonstrate that mean-variance optimization is not evolutionary stable while the CAPM-rule always imitates the best portfolio rule and survives.

Keywords: portfolio theory; evolutionary finance; incomplete markets (search for similar items in EconPapers)
JEL-codes: D52 D8 D83 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-evo and nep-fin
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