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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2006/23:
On the Evolution of Investment Strategies and the Kelly Rule – A Darwinian Approach

Terje Lensberg () and Klaus Reiner Schenk-Hoppé ()

Abstract: This paper complements theoretical studies on the Kelly rule in evolutionary finance by studying a Darwinian model of selection and reproduction in which the diversity of investment strategies is maintained through genetic programming. We find that investment strategies which optimize long-term performance can emerge in markets populated by unsophisticated investors. Regardless whether the market is complete or incomplete and whether states are i.i.d. or Markov, the Kelly rule is obtained as the asymptotic outcome. With price-dependent rather than just state-dependent investment strategies, the market portfolio plays an important role as a protection against severe losses in volatile markets.

Keywords: Evolutionary finance; portfolio choice; asset pricing; genetic programming; (follow links to similar papers)

JEL-Codes: C63; G11; (follow links to similar papers)

29 pages, December 19, 2006

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