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

Authors: Muhammad Naeem Shahid; Semei Coronado; Abdul Sattar

Addresses: School of Management Studies, The University of Faisalabad, West Canal Road, Faisalabad, Pakistan ' Departamento de Metodos Cuantitativos, Centro Universitario de Ciencias Economico Administrativas, Universidad de Guadalajara, Periférico Norte N° 799, Núcleo Universitario Los Belenes, 45100, Zapopan, Jalisco, México ' Department of Management Sciences, Bahria University, Shangrila Road E-8 Islamabad, Pakistan

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.

DOI: 10.1504/AAJFA.2019.099488

Afro-Asian Journal of Finance and Accounting, 2019 Vol.9 No.2, pp.167 - 192

Received: 28 Sep 2017
Accepted: 09 Jan 2018

Published online: 24 Apr 2019 *

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