The Lambda Star Strategy
An investor following the generalized Lambda Star rule, which has been formularized as equation (1) according to Amir et al. (2009), invests according to the expected discounted sum of the relative dividends at all the future dates. Allowing a different setting where the pool of assets includes the creation and destruction of firms will probably lead to different results on the performance of the Lambda Star strategy in reality from that in the theoretical evolutionary finance model. That is to say, the survival and stability regarding the Lambda Star strategy listed in section 2.2 are no longer applicable in our setting with varying pool of assets and the Lambda Star strategy might perform worse than other competing investment strategies. …show more content…
One simple substitute of the strategy can be computed by equating the portfolio weights of the Lambda Star strategy to the current relative dividends. This assumption makes sense when we come to the fact that the dividend payments by firms are generally “sticky”, meaning most companies set absolute dividends and stick with those dividends through good and bad times. Managers of most companies are generally reluctant to cut dividends because investors often interpret a reduction in dividend as bad news and the stock prices will consequently drop. Lintner (1956) propose the concept of dividend smoothing, which states that the firms strive to main the dividend stability and consistency with the past dividend policy. The dividend paid during the current year is governed by the dividends paid during the previous year and variations in the earnings should not be reflected in the dividend payout. Brav et al.(2005) carried out a survey in dividend payout policies among a large number of companies and results show that most managers treat the maintenance of dividends and the investment decisions equally important for the companies’ development. Following Brav et al. (2005), Skinner (2008) find that firms sustain their dividends out of tradition because the “stickiness” reflects the past and firms that paid dividends are likely to hold on this policy in the future …show more content…
The strategy allocates no longer capital to stocks that are delisted or that stop paying dividends. This form of the Lambda Star strategy appears as if the states of the world follow a martingale process where the mean of the future is equal to the present, regardless of the past. The strategy can be formally defined
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