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Testing the Empirical Validity of the Adaptive Markets Hypothesis

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  • Hany Fahmy

    (University of Waterloo)

Abstract

"The issue of market efficiency attracted the attention of academicians since the existence of financial markets. Over time, two schools of thoughts were established: the efficient markets school and the behavioral finance school. Proponents of the former believed in the Efficient Markets Hypothesis whereas the latter brought evidence from behavioral finance and psychology to demonstrate that financial markets are inefficient and this inefficiency is attributed to the irrational behavior of investors in making financial choices regarding asset allocation and portfolio construction. Recently, an adaptive reconciliation was suggested, which posits that investors' adaptability is what brings back inefficient markets to efficiency. The purpose of this paper is to test empirically the validity of the Adaptive Markets Hypothesis via a smooth transition regression model with exogenous threshold variable. The results support the reconciliation and show that markets are indeed efficient sometimes and inefficient most of the time."

Suggested Citation

  • Hany Fahmy, 2017. "Testing the Empirical Validity of the Adaptive Markets Hypothesis," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 9(2), pages 169-184, December.
    • Handle: RePEc:ren:journl:v:9:y:2017:i:2:p:169-184
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    Cited by:

    1. Fahmy, Hany, 2023. "Satiation, habit formation, and other temporal anomalies: Extending the choice theory to multiple neighborhoods of time," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 163-173.
    2. Fahmy, Hany, 2020. "Mean-variance-time: An extension of Markowitz's mean-variance portfolio theory," Journal of Economics and Business, Elsevier, vol. 109(C).

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