Evolutionary Finance And Empirical Studies On Chinese Stock Markets

This paper attacks the dynamics and general equilibrium problem of continuous trading market selection by means of Darwin evolutionary ideas. The main achievements are summarized in the following.In the setting there are lots of assets, each of which generates relative dividend exogenously and independently on present amount of wealth. Expected relative dividends are constant all the time and the asset prices are endogenously determined by supply and demand. There exist only two kinds of investors who invest according to fix-mix strategies. This paper shows that an asset gains profit if and only if its relative dividend is more than its relative price. The fix-mit in accord with expected relative dividends is globally asymptotically evolutionary stable and asset prices equal to expected relative dividends in an equilibrium. It is financial innovation that makes markets effective. Without financial innovation, the asset prices can be twisted into anything available. These conclusions contribute to natural selection hypothesis believed by Alchian(1950), Friedman(1953) and Fama(1965) and provide a rigorous analysis to the hypothesis as well.This paper develops a continuous-time evolutionary finance model with time-dependent strategies also. We certify that there always exists arbitrage opportunities in financial markets if investors are well informed and pay no costs. However, the arbitrage is extremely limited in an approximate equilibrium market and actually, arbitrage opportunities can only be taken by large investors like financial institutions. Two arbitrage strategies, which are simple and easy to implement, are presented according to two different situations, non-equilibrium and equilibrium in approximation. In an approximate equilibrium market, asset price is proved to equal to the sum of the discounted cash flows over its lifetime. The merit and fault are explored while taking earnings multiple as an index in valuating a stock and we argue that the synthesized return coined by us, instead of earnings multiple, appears superior. The conclusions can explain some facts in finance and give a reply to the continuing controversy over some fundamental financial problems. For instance, are markets efficient or arbitrage free? How to generate profit from arbitrage opportunities? Is it true that asset prices must be valued by the sum of the discounted cash flows, why? Moreover, why can financial institution control asset prices? How to do so? Why does the demand of a stock sometimes increase abnormally while its price goes up? Why are some stocks with higher earnings multiple unusually more popular to investors? Our answers to them from evolutionary finance are different with those from both traditional and behavioral finance.This paper studies an application of a Darwinian theory of portfolio selection to the Chinese stock market. We analyze numerically the long-run outcome of the competition of fix-mix portfolio rules in a a stock with actual dividends. By simulation we verify that the fix-mix portfolio rule in accord with expected relative dividends is evolutionary stable and will conquer all the market wealth eventually. The asset prices approach gradually to their expected relative dividends. The simulation also shows that the more all investors consume the fiercer the competition becomes and hence, the faster the market evolution appears.