Evolution of Portfolio Rules in Incomplete Markets

Zurich IEER Working Paper No. 74

31 Pages Posted: 26 Oct 2001

See all articles by Thorsten Hens

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

Klaus Reiner Schenk-Hoppé

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

Date Written: October 2001

Abstract

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

Hens, Thorsten and Schenk-Hoppé, Klaus Reiner, Evolution of Portfolio Rules in Incomplete Markets (October 2001). Zurich IEER Working Paper No. 74. Available at SSRN: https://ssrn.com/abstract=288610 or http://dx.doi.org/10.2139/ssrn.288610

Thorsten Hens (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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