Scandinavian Working Papers in Business Administration

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2005/17: Globally Evolutionarily Stable Portfolio Rules

Igor V. Evstigneev (), Thorsten Hens () and Klaus Reiner Schenk-Hoppé ()
Additional contact information
Igor V. Evstigneev: School of Social Sciences, University of Manchester, Postal: The University of Manchester , School of Social Sciences, Oxford Road , Manchester , M13 9PL , United Kingdom
Thorsten Hens: Institute for Empirical Research in Economics, University of Zurich, Postal: University of Zurich, Institute for Empirical Research in Economics, Blümlisalpstrasse 10, 8006 Zürich, Switzerland
Klaus Reiner Schenk-Hoppé: Accounting and Finance Division, Leeds University Business School, Postal: Leeds University Business School, Accounting and Finance Division, Maurice Keyworth Building, LS2 9JT, United Kingdom

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.”

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

JEL-codes: C61; C62; G11

33 pages, December 22, 2005

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