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Guido Caldarelli, M. Piccioni and Emanuela Sciubba ()
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Guido Caldarelli: Universit la Sapienza
M. Piccioni: INFM Sezione di Roma1 Universita' la Sapienza

No 334, Computing in Economics and Finance 2000 from Society for Computational Economics

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, 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 characterise a portfolio rule that, with some probability, dominates on logarithmic utility maximisers.

Date: 2000-07-05
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