Does the Adaptive Market Hypothesis Reconcile the Behavioral Finance and the Efficient Market Hypothesis?

Umara Noreen, Attayah Shafique (), Usman Ayub and Syed Kashif Saeed
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Umara Noreen: College of Business Administration, Prince Sultan University, Riyadh 11586, Saudi Arabia
Attayah Shafique: Department of Management Sciences, COMSATS University Islamabad, Islamabad 45550, Pakistan
Usman Ayub: Department of Management Sciences, COMSATS University Islamabad, Islamabad 45550, Pakistan
Syed Kashif Saeed: Department of Communication and Management Sciences, Pakistan Institute of Engineering and Applied Sciences, Nilore, Islamabad 44000, Pakistan

Risks, 2022, vol. 10, issue 9, 1-14

Abstract: This study aims to test the adaptive market hypothesis by using the myopic behavior of investors as a new proxy. The data have been taken from New York Stock Exchange from December 1994 to December 2020. Following this collection of data, the companies’ stock prices were distributed into six different portfolios based on size, investment, a book-to-market value, and operating profit. Ordinal logistic regression was used to calculate the probability of recovery of losses after experiencing a decline in the market. As part of the robustness analysis, this study replaces the Sharpe ratio with a Lower Partial Moment ratio. Most of the results for the Sharpe ratio and Lower Partial Moment ratio are similar. During 1995–1999, 2002–2006, and 2010–2020, the investors have not shown myopic behavior towards losses, but from 2000–2001 and 2007–2009 the investors exhibited myopic characteristics. Furthermore, as investors move between myopic and non-myopic loss aversion, the study reports that the US market is both efficient and inefficient at various points in time, following the adaptive market hypothesis. Thus, such a finding could act as a basis for future investment models by adapting traditional models or by building and contributing to the development of new ones.

Keywords: adaptive market hypothesis; myopic loss aversion; efficient market hypothesis; behavioral finance (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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