Investigating the Empirical Validity of the Adaptive Market Hypothesis Using the Regime switching Approach in the Tehran Stock Exchange

Document Type : Original Article

Authors
Asadi Gholamhossein 1
Esmaeil Fadaeenezhad 1
Hamid Faroughi 2
1 Associate Prof, Department of Management and accounting, University of Shahid Beheshti, Tehran, Iran
2 Ph.D. Student in Finance Management, Faculty of Management and accounting, University of Shahid Beheshti, Tehran, Iran
10.30495/jik.0621.23457
Abstract
The purpose of this paper is to examine the empirical validity of the Adaptive Market Hypothesis (AMH), which is suggested to resolve the controversy between proponents of the efficient market hypothesis and financial behavior school. This hypothesis is based on the principle that although inefficiencies in the financial markets stems from the irrational behavior of investors, when investors adapt themselves to the changing environment as part of an evolutionary process, this adaptability in the shape of switching regime returns the market to an efficient state. To test the empirical validity of this hypothesis, the logistic smooth transition autoregressive model (LSTAR), which is one of the regimes switching models, and statistical information for the period 1388-1398 based on the frequency of quarterly data for variables namely, index return, price-to-income and market-to-book ratio have been used. The results obtained from this study show that the return of the Tehran Stock Exchange index changes behavior in accordance with the adaptive hypothesis under efficient and inefficient regimes.
Keywords
Adaptive market hypothesis
Regime switching models
smooth transition autoregressive models
Price-to-Income and Market-to-Book ratio
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