Globally evolutionarily stable portfolio rules

Igor Evstigneev, Thorsten Hens and Klaus Schenk-Hoppé

Journal of Economic Theory, 2008, vol. 140, issue 1, 197-228

Abstract: The paper examines a dynamic model of a financial market with endogenous asset prices determined by short-run equilibrium of supply and demand. Assets pay dividends that are partially consumed and partially reinvested. The traders use fixed-mix investment strategies (portfolio rules), distributing their wealth between assets in fixed proportions. Our main goal is to identify globally evolutionarily stable strategies, allowing an investor to "survive," i.e., to accumulate in the long run a positive share of market wealth, regardless of the initial state of the market. It is shown that there is a unique portfolio rule with this property--an analogue of the famous Kelly rule of "betting your beliefs." A game theoretic interpretation of this result is given.

Date: 2008
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Working Paper: Globally Evolutionarily Stable Portfolio Rules (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:140:y:2008:i:1:p:197-228

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