 Wealth dynamics and a bias toward momentum tradingFinance Research Letters, 2012, vol. 9, issue 1, 21-28 Abstract: Evolutionary metaphors have been prominent in both economics and finance. They are often used as basic foundations for rational behavior and efficient markets. Theoretically, a mechanism which selects for rational investors requires many caveats, and is far from generic. This paper tests wealth based evolution in a simple, stylized agent-based financial market. The setup borrows extensively from current research in finance that considers optimal behavior with some amount of return predictability. In the case of utility functions which differ from log, wealth selection alone converges to parameters which are economically far from the optimal forecast parameters. This serves as a strong reminder that wealth selection and utility maximization are not the same thing. Therefore, suboptimal financial forecasting strategies may be difficult to drive out of a market, and may even do quite well for some time. Keywords: Evolution; Asset pricing; Financial time series; Momentum (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:9:y:2012:i:1:p:21-28 DOI: 10.1016/j.frl.2011.09.001 Access Statistics for this article Finance Research Letters is currently edited by R. Gençay More articles in Finance Research Letters from Elsevier |
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