On the Evolution of Investment Strategies and the Kelly Rule – A Darwinian Approach

Terje Lensberg and Klaus Schenk-Hoppé

No 2006/23, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: This paper complements theoretical studies on the Kelly rule in evolutionary finance by studying a Darwinian model of selection and reproduction in which the diversity of investment strategies is maintained through genetic programming. We find that investment strategies which optimize long-term performance can emerge in markets populated by unsophisticated investors. Regardless whether the market is complete or incomplete and whether states are i.i.d. or Markov, the Kelly rule is obtained as the asymptotic outcome. With price-dependent rather than just state-dependent investment strategies, the market portfolio plays an important role as a protection against severe losses in volatile markets.

Keywords: Evolutionary finance; portfolio choice; asset pricing; genetic programming (search for similar items in EconPapers)
JEL-codes: C63 G11 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2006-12-19
New Economics Papers: this item is included in nep-cbe, nep-cmp, nep-evo and nep-knm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: On the Evolution of Investment Strategies and the Kelly Rule – A Darwinian Approach (2006)
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