Evolutionary Stable Stock Markets

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

No iewwp170, IEW - Working Papers from Institute for Empirical Research in Economics - IEW

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.

Keywords: evolutionary .nance; portfolio theory; incomplete markets (search for similar items in EconPapers)
JEL-codes: G11 D52 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
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Related works:
Working Paper: Evolutionary Stable Stock Markets (2003)
Journal Article: Evolutionary stable stock markets (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:zur:iewwpx:170

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