Evolution of Portfolio Rules in Incomplete Markets
Zurich IEER Working Paper No. 74
31 Pages Posted: 26 Oct 2001
Date Written: October 2001
The paper considers the evolution of portfolio rules in markets with stationary returns and endogenous prices. The ultimate success of a portfolio rule is measured by the wealth share the rule is eventually able to conquer in competition with other portfolio rules. We give necessary and sufficient conditions for portfolio rules to be evolutionary stable. In the case of i.i.d. returns we identify a simple portfolio rule to be the unique evolutionary stable strategy. Moreover we demonstrate that mean-variance optimization is not evolutionary stable while the CAPM-rule always imitates the best portfolio rule and survives.
Keywords: Portfolio theory, evolutionary finance, incomplete markets
JEL Classification: D52, D81, D83, G11
Suggested Citation: Suggested Citation