Evolutionary Stability of Portfolio Rules in Incomplete Markets

Thorsten Hens and Klaus Schenk-Hoppé
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Thorsten Hens: University of Zurich

No 03-03, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper studies the evolution of market shares of portfolio rules in incomplete markets with short-lived assets. Prices are determined endogenously. The performance of a portfolio rule in the process of continuous reinvestment of wealth is determined by the market share eventually conquered in competition with other portfolio rules. Using random dynamical systems theory, we derive necessary and sufficient conditions for the evolutionary stability of portfolio rules. In the case of Markov (in particular i.i.d.) payoffs these local stability conditions lead to a simple portfolio rule that is the unique evolutionary stable strategy. This rule possesses an explicit representation. Moreover, it is demonstrated that mean-variance optimization is not evolutionary stable while the CAPM-rule always imitates the best portfolio rule and survives.

Keywords: evolutionary finance; portfolio theory; market selection; incomplete markets (search for similar items in EconPapers)
JEL-codes: D52 D81 D83 G11 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2003-01
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Evolutionary stability of portfolio rules in incomplete markets (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0303

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