SIFR Research Report Series, Institute for Financial Research
Yuriy Fedyk and Johan Walden
High-Speed Natural Selection in Financial Markets with Large State Spaces
Abstract: Recent research has suggested that natural selection in
financial markets may be a very slow process, taking hundreds of years. We
show in a general equilibrium model that it may be much faster in markets
with large state spaces. In many cases, the time it takes to wipe out
irrational investors is inversely proportional to the number of stocks in
the market, i.e., if it takes about 500 years with one stock, it takes
about one year with 500 stocks. Thus, theoretically, natural selection can
be very efficient even when there is high market uncertainty. The speed of
the natural selection process is a known function of irrational investors'
sentiment and of the real characteristics of the stock market. According to
a calibration to U.S. stock data, it takes about fifty years for an
irrational investor to be wiped out. This is in line with studies of
individual investor underperformance.
Keywords: Asset pricing; Market selection hypothesis; Natural selection; (follow links to similar papers)
JEL-Codes: G11; G12; (follow links to similar papers)
38 pages, April 15, 2007
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Anki Helmer ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom