Nº 22-06: Behavioral Heterogeneity in the CAPM with Evolutionary Dynamics

The paper shows how the standard two-period CAPM with exogenous wealth and exogenous returns can be extended inter-temporally by including the evolution of wealth from the Evolutionary Finance model of Evstigneev, Hens and Schenk-Hoppe (2011). The missing link between the two models is given by the CAPM with heterogeneous behavior derived by Hens and Naebi (2020). This paper delivers theoretical and empirical results for behavioral heterogeneity in the CAPM with evolutionary dynamics. As a result of the market selection process, we derive a beta based on fundamentals to which the standard beta tends to converge asymptotically. This is confirmed by data from the DJIA.