Globally Evolutionarily Stable Portfolio Rules

FINRISK Working Paper No. 238

43 Pages Posted: 20 Sep 2005 Last revised: 23 Nov 2007

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

Klaus Reiner Schenk-Hoppé

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

Date Written: September 25, 2007

Abstract

The paper examines a dynamic model of a financial market with endogenous asset prices determined by short run equilibrium of supply and demand. Assets pay dividends that are partially consumed and partially reinvested. The traders use fixed-mix investment strategies (portfolio rules), distributing their wealth between assets in fixed proportions. Our main goal is to identify globally evolutionarily stable strategies, allowing an investor to survive, i.e. to accumulate in the long run a positive share of market wealth, regardless of the initial state of the market. It is shown that there is a unique portfolio rule with this property - an analogue of the famous Kelly (1956) rule of betting one's beliefs. A game theoretic interpretation of this result is given.

Keywords: Evolutionary Finance, Wealth Dynamics, Survival and Extinction of Portfolio Rules, Evolutionary Stability, Kelly Rule

JEL Classification: G11, C61, C62

Suggested Citation

Evstigneev, Igor V. and Hens, Thorsten and Schenk-Hoppé, Klaus Reiner, Globally Evolutionarily Stable Portfolio Rules (September 25, 2007). Available at SSRN: https://ssrn.com/abstract=804346 or http://dx.doi.org/10.2139/ssrn.804346

Igor V. Evstigneev

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

Oxford Road
Manchester, M13 9PL
United Kingdom
+44 161 2754275 (Phone)
+44 161 2754812 (Fax)

HOME PAGE: http://www.evstigneev.net

Thorsten Hens

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 (Contact Author)

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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