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Efficient or adaptive markets? Evidence from major stock markets using very long run historic data

Efficient or adaptive markets? Evidence from major stock markets using very long run historic data
Efficient or adaptive markets? Evidence from major stock markets using very long run historic data
This paper empirically investigates the Adaptive Market Hypothesis (AMH) in three of the most established stock markets in the world; the US, UK and Japanese markets using very long run data. Daily data is divided into five-yearly subsamples and subjected to linear and nonlinear tests to determine how the independence of stock returns has behaved over time. Further, a five-type classification is proposed to distinguish the differing behaviour of stock returns. The results from the linear autocorrelation, runs and variance ratio tests reveal that each market shows evidence of being an adaptive market, with returns going through periods of independence and dependence. However, the results from the nonlinear tests show strong dependence for every subsample in each market, although the magnitude of dependence varies quite considerably. Thus the linear dependence of stock returns varies over time but nonlinear dependence is strong throughout. Our overall results suggest that the AMH provides a better description of the behaviour of stock returns than the Efficient Market Hypothesis
1057-5219
130-142
Urquhart, Andrew
ee369df1-95b5-4cdf-bc24-f1be77357c03
Hudson, Robert
60672e7a-4142-4354-9a41-552a3db97157
Urquhart, Andrew
ee369df1-95b5-4cdf-bc24-f1be77357c03
Hudson, Robert
60672e7a-4142-4354-9a41-552a3db97157

Urquhart, Andrew and Hudson, Robert (2013) Efficient or adaptive markets? Evidence from major stock markets using very long run historic data. International Review of Financial Analysis, 28, 130-142.

Record type: Article

Abstract

This paper empirically investigates the Adaptive Market Hypothesis (AMH) in three of the most established stock markets in the world; the US, UK and Japanese markets using very long run data. Daily data is divided into five-yearly subsamples and subjected to linear and nonlinear tests to determine how the independence of stock returns has behaved over time. Further, a five-type classification is proposed to distinguish the differing behaviour of stock returns. The results from the linear autocorrelation, runs and variance ratio tests reveal that each market shows evidence of being an adaptive market, with returns going through periods of independence and dependence. However, the results from the nonlinear tests show strong dependence for every subsample in each market, although the magnitude of dependence varies quite considerably. Thus the linear dependence of stock returns varies over time but nonlinear dependence is strong throughout. Our overall results suggest that the AMH provides a better description of the behaviour of stock returns than the Efficient Market Hypothesis

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More information

Published date: June 2013
Organisations: Centre for Digital, Interactive & Data Driven Marketing

Identifiers

Local EPrints ID: 354532
URI: http://eprints.soton.ac.uk/id/eprint/354532
ISSN: 1057-5219
PURE UUID: f11363e5-0413-4025-b5d8-07907bfa7567
ORCID for Andrew Urquhart: ORCID iD orcid.org/0000-0001-8834-4243

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Date deposited: 12 Jul 2013 10:40
Last modified: 27 Apr 2022 01:59

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Contributors

Author: Andrew Urquhart ORCID iD
Author: Robert Hudson

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