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Analyzing market efficiency: The role of business cycles, risk aversion, and Occam’s razor in the Adaptive Market Hypothesis

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  • Hřebačka, Viktor

Abstract

In this study, we analyze US stock market return predictability using autocorrelation and variance ratios. We show that relationships in Adaptive Market Hypothesis (AMH) literature can be explained by business cycles and risk aversion, without invalidating the Efficient Market Hypothesis (EMH). We argue that, following Occam’s razor, the more parsimonious EMH should be preferred over many AMH effects. Additionally, we contend that current AMH testing methodologies have theoretical issues that prevent them from convincingly advancing our understanding beyond the established EMH paradigm.

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  • Hřebačka, Viktor, 2025. "Analyzing market efficiency: The role of business cycles, risk aversion, and Occam’s razor in the Adaptive Market Hypothesis," Finance Research Letters, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325001059
    DOI: 10.1016/j.frl.2025.106840
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