From Discrete to Continuous Time Evolutionary Finance Models

Palczewski, Jan; Schenk-Hoppé, Klaus Reiner

doi:10.2139/ssrn.1288564

From Discrete to Continuous Time Evolutionary Finance Models

Swiss Finance Institute Research Paper No. 08-30

28 Pages Posted: 28 Oct 2008

See all articles by Jan Palczewski

Jan Palczewski

University of Leeds - School of Mathematics

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: October 15, 2008

Abstract

This paper aims to open a new avenue for research in continuous-time financial market models with endogenous prices and heterogenous investors. The main result is the derivation of the limit of a discretetime evolutionary stock market model as the length of the time period tends to zero. The resulting explicit model in continuous-time generalizes the workhorse model of mathematical finance by introducing asset prices that are driven by the market interaction of investors following self-financing trading strategies. Our approach also offers a numerical scheme for the simulation of the continuous-time model.

Keywords: evolutionary finance, market interaction, wealth dynamics, self-financing strategies, endogenous prices

JEL Classification: G11, G12

Suggested Citation: Suggested Citation

Palczewski, Jan and Schenk-Hoppé, Klaus Reiner, From Discrete to Continuous Time Evolutionary Finance Models (October 15, 2008). Swiss Finance Institute Research Paper No. 08-30. Available at SSRN: https://ssrn.com/abstract=1288564 or http://dx.doi.org/10.2139/ssrn.1288564