Abstract
This chapter presents a new approach to the modelling of financial markets combining behavioural and evolutionary principles. It describes a dynamic equilibrium model with long-lived dividend-paying assets in which the notion of a short-run equilibrium is defined directly in terms of the strategy profile of investors, rather than their (typically unobservable) individual utilities and beliefs. This approach makes it possible to reflect a whole variety of patterns of market behaviour, not necessarily describable in terms of utility maximization. The highlight of the chapter is a result describing an (asymptotically unique) evolutionary stable strategy, guaranteeing ”survival” in the market selection process.
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Notes
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Kahneman and Smith: the 2002 Nobel Laureates in Economics.
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The 2013 Nobel Prize in Economics.
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However, it should be emphasized that instead of weighing assets according to their prices, in Λ ∗ the weights are based on fundamentals. In practice, Λ ∗ is an example of fundamental indexing (Arnott, Hsu and West, 2008).
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Evstigneev, I.V., Hens, T., Schenk-Hoppé, K.R. (2015). Behavioral Equilibrium and Evolutionary Dynamics. In: Mathematical Financial Economics. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-16571-4_20
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DOI: https://doi.org/10.1007/978-3-319-16571-4_20
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-16570-7
Online ISBN: 978-3-319-16571-4
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