Evolutionary Stable Stock Markets

Igor Evstigneev, Thorsten Hens and Klaus Schenk-Hoppé
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Thorsten Hens: University of Zurich

No 03-39, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper shows that a stock market is evolutionary stable if and only if stocks are evaluated by expected relative dividends. Any other market can be invaded by portfolio rules that will gain market wealth and hence change the valuation. In the model the valuation of assets is given by the wealth average of the portfolio rules in the market. The wealth dynamics is modelled as a random dynamical system. Necessary and sufficient conditions are derived for the evolutionary stability of portfolio rules when (relative) dividend payoffs form a stationary Markov process. These local stability conditions lead to a unique evolutionary stable strategy according to which assets are evaluated by expected relative dividends.

Keywords: evolutionary finance; portfolio theory; incomplete markets (search for similar items in EconPapers)
JEL-codes: D52 D81 G11 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2003-10
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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http://www.econ.ku.dk/english/research/publications/wp/2003/0339.pdf/ (application/pdf)

Related works:
Journal Article: Evolutionary stable stock markets (2006)
Working Paper: Evolutionary Stable Stock Markets
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0339

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