Evolutionary Finance Simulation of Long Term Equity Portfolio Management System

This paper focuses on the application of evolutionary finance to long-term equity portfolio management. Based on Charles Darwin's theory of evolution and the associated theory of natural selection, evolutionary finance offers a promising third paradigm after traditional finance and behavioural finance. From an evolutionary finance perspective, capital markets are made up by investors who use their portfolio strategies that interact frequently with each other to compete for market capital, much alike the competition amongst biological species in ecology for finite resources. By adopting an evolutionary investment model, we provide some evidence for the evolutionary finance approach to long-term equity portfolio strategies. We simulate the competition for capitals amongst some simple rebalancing rules under repeated interactions in a market model for many periods, using historic dividend data of firms listed on the Australian Stock Exchange. Our results illustrate a long term winner of market share known as the evolutionary investment rule, as well as some market phenomena like excess volatility and an irrational rule winning market share over a rational rule.