When Political Uncertainty Mimics Efficiency under the Adaptive Markets Hypothesis: Peru as a Rare Case Today, a Precedent for Tomorrow?

Julio Villavicencio Vásquez
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Julio Villavicencio Vásquez: Departamento de Economía de la Pontificia Universidad Católica del Perú

No 2026-556, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: This paper examines how extreme domestic political uncertainty disrupts expectation formation in the Peruvian stock market, causing market dynamics to appear as statistical efficiency —lower return predictability— rather than the temporary inefficiency predicted by the standard Adaptive Markets Hypothesis. Using weekly data from 1990 to 2026, the study applies parametric and nonparametric rolling variance ratio tests to compare global shocks and domestic political events, supported by fractional logit regressions for the latter. The evidence reveals a sharp asymmetry. Global crises, such as the Great Recession and the COVID-19 pandemic, generate temporary return predictability, consistent with investors relying on imperfect heuristics before adapting. By contrast, domestic political shocks produce the opposite pattern. Elections involving radical or outsider candidates and episodes of institutional crisis reduce return predictability, moving the market toward statistical efficiency. This does not indicate better information processing, but a breakdown in expectation formation under extreme regime uncertainty. Comparative evidence from Latin America suggests that Peru’s party-system collapse and weak institutionalization explain this distinctive response. The paper shows that institutional fragility can reshape, and even invert, standard adaptive-market dynamics. Palabras claves: Política y finanzas, Hipótesis de Mercados Adaptativos, Mercados eficientes, Rolling variance ratio, Mercado de valores peruano. JEL Classification-JE: G14, G15, G41, D84, D72, C12

Keywords: Politics and finance; Adaptive markets Hypothesis; Efficient markets; Rolling variance ratio; Peruvian stock market. (search for similar items in EconPapers)
Pages: 60
Date: 2026
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