Evolution and Market Behavior with Endogenous Strategies
speaker: Pietro Dindo (Università Ca Foscari di Venezia, Dipartimento di Economia)abstract: We investigate wealth-driven strategy selection in a complete market with risky assets paying stochastic dividends. As in real markets, traders investment strategies are based on both dividends and past realized prices. We are interested in assessing whether investment strategies can be ordered with respect to their relative profitability, or, in other terms, if a dominance relation can be established which uniquely selects the strategy surviving in the long run. We study the random dynamical system describing market dynamics and, using local stability analysis for steady-state solutions, we identify the conditions under which one single investor dominates the market. The general result depends on whether a price feedback mechanism between expected and realized price is part of traders’ investment strategies. Confirming previous results, we find that when agents look only at dividends an order relation can always be established. Conversely, when agents base their investment decisions on past realized prices, our new results show that an order relation can be established only when the market is stable. We are able to derive precise conditions for the existence of an order relation depending on the strength of the feedback mechanism linking the history of realized prices to trader’s portfolio choices , and conditional to the ecology of strategy actively trading in the market. However, irrespectively of the traders’ investment behavior, allocating wealth proportionally to expected relative dividends is the strategy which, in the long run, dominates the market.
timetable:
Fri 2 Oct, 17:45 - 18:30, Aula 3
documents:
dindo
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