Market Selection and Survival of Investment Strategies
Zurich IEER Working Paper No. 91
23 Pages Posted: 14 Nov 2001
Date Written: October 2001
The paper analyzes the process of market selection of investment strategies in an incomplete asset market. The pay offs of the assets depend on random factors described in terms of a discrete-time Markov process. Market participants make dynamic investment decisions based on their observations and time. We show that a trader distributing wealth across available assets according to the relative expected returns eventually accumulates the entire market wealth. The result obtains under the assumption that the trader's strategy is asymptotically distinct from the CAPM strategy (prescribing investment in the market portfolio). This assumption turns out to be essentially necessary for the conclusion.
Keywords: evolutionary finance, portfolio theory, investment strategies, CAPM, market selection, incomplete markets
JEL Classification: D52, D81, D83, G11
Suggested Citation: Suggested Citation