The asset market game

Carlos Alós-Ferrer, Ana B. Ania

Research output: Contribution to journalArticlepeer-review

Abstract

This paper models asset markets as a game where assets pay according to an arbitrary returns matrix, investors decide on fractions of wealth to allocate to each asset, and prices result from market clearing. The only pure-strategy Nash equilibrium is to split wealth proportionally to the assets' expected returns, which can be interpreted as investing according to the fundamentals. Further, the equilibrium strategy is evolutionarily stable in the sense of Schaffer [Journal of Theoretical Biology 132 (1988) 469-478]. We also study the stability properties of the equilibrium in an evolutionary dynamics where wealth flows with higher probability into those strategies that obtain higher realized payoffs.

Original languageEnglish (US)
Pages (from-to)67-90
Number of pages24
JournalJournal of Mathematical Economics
Volume41
Issue number1-2
DOIs
StatePublished - Feb 2005

Keywords

  • Asset markets
  • Evolutionary stability
  • Market efficiency
  • Portfolio choice

ASJC Scopus subject areas

  • Economics and Econometrics
  • Applied Mathematics

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