A Numerical Study on the Evolution of Portfolio Rules: Is CAPM Fit for Nasdaq?

G. Caldarelli, M. Piccioni and Emanuela Sciubba
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G. Caldarelli: INFM and Dip Fisica,"La Sapienza" Rome, Italy
M. Piccioni: INFM and Dip Fisica,"La Sapienza" Rome, Italy

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Abstract: In this paper we test computationally the performance of CAPM in an evolutionary setting. In particular we study the stability of wealth distribution in a financial market where some traders invest as prescribed by CAPM and others behave according to different portfolio rules. Our study is motivated by recent analytical results that show that, whenever a logarithmic utility maximiser enters the market, traders who either ``believe'' in CAPM and use it as a rule of thumb for their portfolio decisions, or are endowed with genuine mean-variance preferences, vanish in the long run. Our analysis provides further insights and extends these results. We simulate a sequence of trades in a financial market and: first, we address the issue of how long is the long run in different parametric settings; second, we study the effect of heterogeneous savings behaviour on asymptotic wealth shares. We find that CAPM is particularly ``unfit'' for highly risky environments.

Date: 2000-09
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