Behavioral Equilibrium and Evolutionary Dynamics in Asset Markets

40 Pages Posted: 9 Apr 2020

See all articles by Igor V. Evstigneev

Igor V. Evstigneev

University of Manchester - Economics, School of Social Sciences

Thorsten Hens

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

Valeriya Potapova

University of Manchester

Klaus Reiner Schenk-Hoppé

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

Date Written: April 7, 2020

Abstract

This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral and evolutionary principles. The core of the model is a non-traditional game-theoretic framework combining elements of stochastic dynamic games and evolutionary game theory. Its key characteristic feature is that it relies only on objectively observable market data and does not use hidden individual agents' characteristics (such as their utilities and beliefs). A central goal of the study is to identify an investment strategy that allows an investor to survive in the market selection process, i.e., to keep with probability one a strictly positive, bounded away from zero share of market wealth over an infinite time horizon, irrespective of the strategies used by the other players. The main results show that under very general assumptions, such a strategy exists, is asymptotically unique and easily computable.

Keywords: Evolutionary finance, Behavioral finance, Stochastic dynamic games, DSGE, survival portfolio rules.

JEL Classification: C73, D53, D58, G11, G02.

Suggested Citation

Evstigneev, Igor V. and Hens, Thorsten and Potapova, Valeriya and Schenk-Hoppé, Klaus Reiner, Behavioral Equilibrium and Evolutionary Dynamics in Asset Markets (April 7, 2020). Swiss Finance Institute Research Paper No. 20-19. Available at SSRN: https://ssrn.com/abstract=3571162 or http://dx.doi.org/10.2139/ssrn.3571162

Igor V. Evstigneev

University of Manchester - Economics, School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
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+44 161 2754275 (Phone)
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HOME PAGE: http://www.evstigneev.net

Thorsten Hens (Contact Author)

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

Plattenstrasse 32
Zurich, 8032
Switzerland
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Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

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Valeriya Potapova

University of Manchester ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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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