The Evolution Dynamic and Long-Run Equilibrium in a Stock Market with Heterogeneous Traders

Abstract

This paper uses ideas from biological evolution to analyze the evolution of the securities market in which rational and irrational traders coexist. A market evolutionary model is developed to describe the dynamic trajectories of rational and irrational traders’ wealth. The main question is, are irrational traders eliminated as the securities market evolves. The paper considers the impact of new entrants on the security market long-term equilibrium. In addition, it discusses the existence and uniqueness of the long-term equilibrium The paper finds that, under some market conditions, irrational traders could survive in the long run.

Keywords

Behavioral Finance / irrational traders / financial evolution theory / random dynamic system