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Type Working Paper
Scope Discipline-based scholarship
Title Market Selection in an Evolutionary Market with Creation and Disappearance of Assets
Organization Unit
Authors
  • Urs Schweri
Language
  • English
Institution University of Zurich
Series Name FINRISK Working Paper Series
Number 316
Date 2006
Abstract Text Identifying investment strategies that will survive in the long run is a main endeavor in the eld of evolutionary nance. The evolutionary perspective on the nancial market considers rather long time horizons, making the creation and disappearance of rms a highly relevant factor in determining such strategies. However, this factor has not been examined in existing research. This paper seeks to ll the gap in the literature by simulating dividends and investment strategies on the basis of initial public offerings (IPOs) and defaults. This paper simulates the evolution of the wealth shares of various investment strategies in a setup wherein dividends are nonstationary. The results show that a modied version of the generalized Kelly rule dominates competing investment strategies in terms of nal wealth. This nding agrees with the existing literature, which suggests that the generalized Kelly rule has good chances of surviving or even taking over the entire market in different setups. However, the creation and dissolution of a rm can only be observed once in the life of a company; therefore, using only a long time series of one company alone is not the most optimal method of estimating the probability that a rm will default. Instead, the dividend process must be understood by examining similar companies. This completely alters the implementation of the generalized Kelly rule compared with the way it is applied in the existing evolutionary nance literature, even when the dividend processes of the companies involved are independent of each other.
Other Identification Number merlin-id:4435
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