Behavioral equilibrium and evolutionary dynamics in asset markets

Igor Evstigneev, Thorsten Hens, Valeriya Potapova and Klaus Schenk-Hoppé

Journal of Mathematical Economics, 2020, vol. 91, issue C, 121-135

Abstract: This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral and evolutionary principles. The core of the model is a non-traditional game-theoretic framework combining elements of stochastic dynamic games and evolutionary game theory. Its key characteristic feature is that it relies only on objectively observable market data and does not use hidden individual agents’ characteristics (such as their utilities and beliefs). A central goal of the study is to identify an investment strategy that allows an investor to survive in the market selection process, i.e., to keep with probability one a strictly positive, bounded away from zero share of market wealth over an infinite time horizon, irrespective of the strategies used by the other players. The main results show that under very general assumptions, such a strategy exists, is asymptotically unique and easily computable.

Keywords: Evolutionary finance; Behavioral finance; Stochastic dynamic games; DSGE; Survival portfolio rules (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Working Paper: Behavioral Equilibrium and Evolutionary Dynamics in Asset Markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:91:y:2020:i:c:p:121-135

DOI: 10.1016/j.jmateco.2020.09.004

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