How important is natural selection respect to environment change in driving financial markets?

Abstract

Abstract A central challenge in evolutionary economics stems from the fact that fitness values are not static quantities but typically fluctuate over time. Based on the longstanding tradition of rigorous mathematical description of evolution in population genetics, we propose a quantitative implementation of fluctuating selection to explain the dynamics of firms’ market capitalizations. We thus estimate the Malthusian fitness of a company from a time series of its market cap. Next, the Fisher/Price theorem allows us to decompose the time variation of mean fitness into a “selection” term and an “environment change” term. The latter encompasses all time changes of fitnesses (due to innovation of firms, changes in economic policy, etc.) We apply this Fluctuating Selection from Market Caps (FSMC) approach to daily market capitalizations of public-owned Fortune 100 companies across 2000-2021. The main findings are: Firstly, most of the change in mean fitness is explained by the environment change. Secondly, the smaller effect of selection has been mainly circumscribed to the three recessions that occurred between 2000 and 2021. Thirdly, recessions were characterized by drops in mean fitness. We conclude by deriving an equation for the evolution of market concentration that explains the observed trend towards greater concentration. JEL codes: B52, C51, C52, C53, C63, G17