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The asset market game

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  • Alos-Ferrer, Carlos
  • Ania, Ana B.

Abstract

This paper models asset markets as a game where assets pay according to an arbitrary payoff matrix, investors decide on fractions of wealth to allocate to each asset, and prices result from market clearing. The only pure-strategy Nash equilibrium is to split wealth proportionally to the assets' expected returns, which can be interpreted as investing according to the fundamentals. Further, the equilibrium is evolutionarily stable in the sense of Schaffer (1988). We also study the stability properties of the equilibrium in an evolutionary dynamics where wealth flows with higher probability into those strategies that obtain higher realized payoffs.
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Suggested Citation

  • Alos-Ferrer, Carlos & Ania, Ana B., 2005. "The asset market game," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 67-90, February.
    • Handle: RePEc:eee:mateco:v:41:y:2005:i:1-2:p:67-90
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    Cited by:

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      • Dmitriy Cherkashin & J. Doyne Farmer & Seth Lloyd, 2009. "The Reality Game," Papers 0902.0100, arXiv.org, revised Feb 2009.
    2. Manfred Nermuth, 2008. "The Structure of Equilibrium in an Asset Market with Variable Supply," Vienna Economics Papers 0804, University of Vienna, Department of Economics.
    3. Hehenkamp, Burkhard & Possajennikov, Alex & Guse, Tobias, 2010. "On the equivalence of Nash and evolutionary equilibrium in finite populations," Journal of Economic Behavior & Organization, Elsevier, vol. 73(2), pages 254-258, February.
    4. Gehrig, Thomas & Güth, Werner & Leví0nský, René & Popova, Vera, 2010. "On the evolution of professional consulting," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 113-126, October.
    5. Thorsten Hens & Stefan Reimann & Bodo Vogt, "undated". "Competitive Nash Equilibria and Two Period Fund Separation," IEW - Working Papers 172, Institute for Empirical Research in Economics - University of Zurich.
    6. Hens, Thorsten & Schenk-Hoppe, Klaus Reiner, 2005. "Evolutionary finance: introduction to the special issue," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 1-5, February.
    7. Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
    8. Manfred Nermuth, 2011. "Competing in Several Areas Simultaneously: The Case of Strategic Asset Markets," Games, MDPI, vol. 2(2), pages 1-26, April.
    9. Chen, Shangrong & Bravo-Melgarejo, Sai & Mongeau, Romain & Malavolti, Estelle, 2023. "Adopting and diffusing hydrogen technology in air transport: An evolutionary game theory approach," Energy Economics, Elsevier, vol. 125(C).
    10. Jonathan Newton, 2018. "Evolutionary Game Theory: A Renaissance," Games, MDPI, vol. 9(2), pages 1-67, May.
    11. Mikhail Zhitlukhin, 2022. "A continuous-time asset market game with short-lived assets," Finance and Stochastics, Springer, vol. 26(3), pages 587-630, July.
    12. Evstigneev, Igor V. & Hens, Thorsten & Schenk-Hoppé, Klaus Reiner, 2008. "Globally evolutionarily stable portfolio rules," Journal of Economic Theory, Elsevier, vol. 140(1), pages 197-228, May.
    13. Follmer, Hans & Horst, Ulrich & Kirman, Alan, 2005. "Equilibria in financial markets with heterogeneous agents: a probabilistic perspective," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 123-155, February.

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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