Open AccessTesting the Empirical Validity of the Adaptive Markets Hypothesis
Author(s) -
Hany Fahmy
Publication year - 2017
Publication title -
review of economic analysis
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.101
H-Index - 1
ISSN - 1973-3909
DOI - 10.15353/rea.v9i2.1440
Subject(s) - inefficiency , financial market , economics , efficient market hypothesis , behavioral economics , financial economics , portfolio , irrational number , capital market , test (biology) , microeconomics , finance , stock market , paleontology , geometry , mathematics , horse , biology
The issue of market e¢ ciency 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.