Market selection of constant proportions investment strategies in continuous time (Q2267531)

The paper aims at developing a theory of endogenous asset pricing based on market interactions of traders in a continuous-time framework. This market interaction of investors plays a central role in their approach: the asset prices are driven by demand and supply, while randomness comes from asset payoff processes (dividends) and variation of traders' behavior. The wealth dynamics in their model is described by a random dynamical system, which can be written as a non-linear differential equation with random coefficients. This equation was not studied before, so authors apply several techniques that are new in this context. In this paper, the authors restrict their analysis only to time-invariant investment strategies. Their main result is the identification of a unique investment strategy which is asymptotically optimal. This strategy \(\lambda^*\) prescribes to divide wealth proportionally to the average dividend intensities of assets. They show that any other time-invariant strategy becomes extinct by losing its wealth to the strategy \(\lambda^*\). This implies that if at least one investor follows \(\lambda^*\), then asset prices converge to a ``fundamental'' value which for risky assets is different from the usual valuation. The authors also compare their approach to other ones and discuss a number of future research directions.