Evolution and market behavior with endogenous investment rules |
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| Affiliation: | 1. Department of Economics, Lund University, Sweden;2. Département de Sciences Économiques and CIREQ, Université de Montréal, Montréal, Québec H3C 3J7, Canada;1. Institute of Operations Research, Hangzhou Dianzi University, Hangzhou, Zhejiang, 310018, China;2. School of Economics, Shanghai University of Finance and Economics, Shanghai 200433, China;3. Department of Economics, Texas A&M University, College Station, TX 77843, USA;1. School of Economics, Sogang University, Baekbeom-ro 35, Mapo-gu, Seoul, 04107, South Korea;2. Faculty of Business and Economics, University of Lausanne, 1015 Lausanne, Switzerland;1. Universitat Autònoma de Barcelona and Barcelona GSE, Departament d''Economia i d''Història Econòmica, Edifici B, UAB, 08193, Bellaterra (Barcelona), Spain;2. Universidad Nacional de San Luis and CONICET, Instituto de Matemática Aplicada de San Luis, Ejército de los Andes 950, 5700, San Luis, Argentina;1. Department of Economics and CIREQ, University of Montreal, P.O. Box 6128, Station Downtown, Montreal QC H3C 3J7, Canada;2. Department of Quantitative Economics, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands |
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| Abstract: | In a repeated market for short-lived assets, we investigate wealth-driven selection among investment rules that depend on endogenous market variables, such as current and past prices. We study the random dynamical system describing prices and wealth dynamics and characterize local stability of the long-run equilibria in which one or a group of traders dominate. Multiplicity of stable and unstable equilibria, leading to path dependency and persistent heterogeneity, turns out to be a common phenomenon generated by two different mechanisms. Firstly, conditioning investment decisions on endogenous market variables implies that the relative performance of investment rules, in terms of average growth rates, may be different for different prevailing prices, so that the market may fail to select a global winner. Secondly, the feedback existing between past asset prices and current investment decisions can lead to a form of deterministic overshooting. |
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| Keywords: | Market selection Evolutionary finance Price feedbacks Kelly rule Asset pricing |
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