From Discrete to Continuous Time Evolutionary Finance Models
28 Pages Posted: 28 Oct 2008
Date Written: October 15, 2008
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
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