() and Klaus Reiner Schenk-Hoppé
Terje Lensberg: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Klaus Reiner Schenk-Hoppé: Leeds University Business School, University of Leeds, Postal: Leeds University Business School, The Maurice Keyworth Building, University of Leeds, Leeds LS2 9JT, United Kingdom
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.
29 pages, December 19, 2006
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