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

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).