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A Numerical Study on the Evolution of Portfolio Rules: Is CAPM Fit for Nasdaq?

Author

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  • G. Caldarelli

    (INFM and Dip Fisica,"La Sapienza" Rome, Italy)

  • M. Piccioni

    (INFM and Dip Fisica,"La Sapienza" Rome, Italy)

  • E. Sciubba

    (Tinbergen Institute Rotterdam, The Netherlands)

Abstract

In this paper we test computationally the performance of CAPM in an evolutionary setting. In particular we study the stability of wealth distribution in a financial market where some traders invest as prescribed by CAPM and others behave according to different portfolio rules. Our study is motivated by recent analytical results that show that, whenever a logarithmic utility maximiser enters the market, traders who either ``believe'' in CAPM and use it as a rule of thumb for their portfolio decisions, or are endowed with genuine mean-variance preferences, vanish in the long run. Our analysis provides further insights and extends these results. We simulate a sequence of trades in a financial market and: first, we address the issue of how long is the long run in different parametric settings; second, we study the effect of heterogeneous savings behaviour on asymptotic wealth shares. We find that CAPM is particularly ``unfit'' for highly risky environments.

Suggested Citation

  • G. Caldarelli & M. Piccioni & E. Sciubba, 2000. "A Numerical Study on the Evolution of Portfolio Rules: Is CAPM Fit for Nasdaq?," Papers cond-mat/0009437, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/0009437
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    References listed on IDEAS

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