A Numerical Study on the Evolution of Portfolio Rules: Is CAPM Fit for Nasdaq?
Abstract
In this paper we test computationally the performance of CAPM in an evolutionary setting. In particular we study the stability of wealth distribution 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, traders who either ``believe'' in CAPM and use it as a rule of thumb for their portfolio decisions, or are endowed with genuine mean-variance preferences, 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.
Cite
@article{arxiv.cond-mat/0009437,
title = {A Numerical Study on the Evolution of Portfolio Rules: Is CAPM Fit for Nasdaq?},
author = {G. Caldarelli and M. Piccioni and E. Sciubba},
journal= {arXiv preprint arXiv:cond-mat/0009437},
year = {2008}
}
Comments
18 pages, 2 eps figures, presented at CEF2000 Barcelona, Spain