On the Evolution of Investment Strategies and the Kelly Rule - a Darwinian Approach

30 Pages Posted: 13 Dec 2006

See all articles by Terje Lensberg

Terje Lensberg

Norwegian School of Economics (NHH) - Department of Finance

Klaus Reiner Schenk-Hoppé

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

Date Written: December 8, 2006

Abstract

This paper complements theoretical studies on the Kelly rule in evolutionary finance by studying a Darwinian model of selection and reproduction in which the diversity of investment strategies is maintained through genetic programming. We find that investment strategies which optimize long-term performance can emerge in markets populated by unsophisticated investors. Regardless whether the market is complete or incomplete and whether states are i.i.d. or Markov, the Kelly rule is obtained as the asymptotic outcome. With price-dependent rather than just state-dependent investment strategies, the market portfolio plays an important role as a protection against severe losses in volatile markets.

Keywords: Evolutionary finance, portfolio choice, asset pricing, genetic programming

JEL Classification: G11, C63

Suggested Citation

Lensberg, Terje and Schenk-Hoppé, Klaus Reiner, On the Evolution of Investment Strategies and the Kelly Rule - a Darwinian Approach (December 8, 2006). Swiss Finance Institute Research Paper No. 06-38. Available at SSRN: https://ssrn.com/abstract=951242 or http://dx.doi.org/10.2139/ssrn.951242

Terje Lensberg

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

Helleveien 30
Bergen, N-5045
Norway
+47 5595 9206 (Phone)

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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