Are stock markets really efficient? Evidence of the adaptive market hypothesis

Andrew Urquhart and Frank McGroarty

International Review of Financial Analysis, 2016, vol. 47, issue C, 39-49

Abstract: This study examines the adaptive market hypothesis in the S&P500, FTSE100, NIKKEI225 and EURO STOXX 50 by testing for stock return predictability using daily data from January 1990 to May 2014. We apply three bootstrapped versions of the variance ratio test to the raw stock returns and also whiten the returns through an AR-GARCH process to study the nonlinear predictability after accounting for conditional heteroscedasticity through the BDS test. We evaluate the time-varying return predictability by applying these tests to fixed-length moving subsample windows and also examine whether there is a relationship between the level of predictability in stock returns and market conditions. The results show that there are periods of statistically significant return predictability, but also episodes of no statistically significant predictability in stock returns. We also find that certain market conditions are statistically significantly related to predictability in certain markets but each market interacts differently with the different market conditions. Therefore our findings suggest that return predictability in stock markets does vary over time in a manner consistent with the adaptive market hypothesis and that each market adapts differently to certain market conditions. Consequently our findings suggest that investors should view each market independently since different markets experience contrasting levels of predictability, which are related to market conditions.

Keywords: Adaptive market hypothesis; Stock return predictability; Market conditions; Market efficiency (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521916301053
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:47:y:2016:i:c:p:39-49

DOI: 10.1016/j.irfa.2016.06.011

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().