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A numerical study on the evolution of portfolio rules

By Guido Caldarelli, Marina Piccioni and Emanuela Sciubba

Abstract

In this paper we test computationally the performance of CAPM in an evolutionary setting. In particular we study the stability of distribution of wealth in a financial market where some traders invest as prescribed by CAPM and others behave according to different portfolio rules. Our study is motivated by recent analytical results that show that, whenever a logarithmic utility maximiser enters the market, CAPM traders vanish in the long run. Our analysis provides further insights and extends these results. We simulate a sequence of trades in a financial market and: first, we address the issue of how long is the long run in different parametric settings; second, we study the effect of heterogeneous savings behaviour on asymptotic wealth shares. We find that CAPM is particularly “unfit” for highly risky environments

Topics: HG Finance, QA Mathematics
Publisher: Springer
Year: 2002
DOI identifier: 10.1007/978-1-4615-0835-9_18
OAI identifier: oai:eprints.imtlucca.it:1193

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