Evolution and market behavior with endogenous investment rules

Giulio Bottazzi and Pietro Dindo

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: In a repeated market for short-lived assets, we investigate long run wealth-driven selection on the general class of investment rules that depend on endogenously determined current and past prices. We study the random dynamical system that describes the price and wealth dynamics and characterize local stability of long-run market equilibria. Instability, leading to asset mis-pricing and informational inefficiencies, turns out to be a common phenomenon generated by two different mechanisms. Firstly, conditioning investment decisions on asset prices implies that dominance of an investment rule on others, as measured by the relative entropy, can be different at different prevailing prices thus reducing the global selective capability of the market. Secondly, the feedback existing between past realized prices and current investment decisions can lead to a form of deterministic overshooting.

Keywords: Market Selection; Evolutionary Finance; Price Feedbacks; Asset Pricing; Informational Efficiency; Kelly rule. (search for similar items in EconPapers)
JEL-codes: D50 D80 G11 G12 (search for similar items in EconPapers)
Date: 2010-11-10
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://www.lem.sssup.it/WPLem/files/2010-20.pdf (application/pdf)

Related works:
Journal Article: Evolution and market behavior with endogenous investment rules (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ssa:lemwps:2010/20

Access Statistics for this paper

More papers in LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy Contact information at EDIRC.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).