Investigating the Empirical Validity of the Adaptive Market Hypothesis Using smooth transition autoregressive model in the Tehran Stock Exchange

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) and statistical information for the period 1385-1398 based on the frequency of quarterly data for variables namely, index return, price-to-income and market-to-book ratio, Infaltion and exchange rate have been used. The results 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
• smooth transition autoregressive models
• return
• tedpix