Stock market behaviour: efficient or adaptive? Evidence from the Pakistan Stock Exchange

Muhammad Naeem Shahid, Semei Coronado and Abdul Sattar

Afro-Asian Journal of Finance and Accounting, 2019, vol. 9, issue 2, 167-192

Abstract: The study empirically investigates the adaptive market hypothesis (AMH) in the Pakistan stock market over the period of 1992 to 2015. Daily data of returns (KSE-100) is divided into eight sub-samples of equal length of three years each and into different market conditions and are subjected to linear/nonlinear tests to elucidate how market-efficiency has behaved over time and whether a relationship exists between market conditions and levels of return predictability. The tests reveal that returns have gone through periods of dependence and independence over eight sub-samples thus Pakistan Stock Exchange is an adaptive market and consistent with the AMH. Furthermore, certain market conditions are more conducive to the predictability of returns as market conditions have also gone through episodes of significant dependence and independence of return predictability, which is also consistent with the AMH. Therefore, overall results of the study suggest that the AMH better elucidates the behaviour of stock returns than conventional efficient market hypothesis (EMH).

Keywords: adaptive market hypothesis; AMH; efficient market hypothesis; EMH; market conditions; linear dependence; nonlinear dependence. (search for similar items in EconPapers)
Date: 2019
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