Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/243487 
Year of Publication: 
2020
Series/Report no.: 
LEM Working Paper Series No. 2020/29
Publisher: 
Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM), Pisa
Abstract: 
This paper studies whether, and to what extent, trading in an incomplete competitive market rewards the CAPM portfolio rule over alternative rules. We find that, if a mean-variance trader faces an agent who invests in each asset proportionally to expected relative payoffs, in the long-run only two scenarios are possible: either the mean-variance trader vanishes or both agents survive with fixed and constant wealth shares. In both cases, asymptotic prices are proportional to assets' expected payoff, and the relation between prices and returns implied by the CAPM does not generally hold. Conversely, when a mean-variance trader faces a generic fixed-mix investor, several long-run outcomes are possible, such as dominance of one trader, survival of both, and generic path-dependency. We provide sufficient conditions to assess such outcomes. We find that the different outcomes can be effectively discussed in terms of the effective risk aversion of the trading strategies, as implied by their portfolio choices conditional on prevailing market prices. In general, a larger effective risk aversion constitutes a survival advantage.
Subjects: 
Selection
Evolution
Capital Asset Pricing Model
Incomplete Markets
JEL: 
C60
D53
G02
G12
G14
Document Type: 
Working Paper

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