Stock returns predictability and the adaptive market hypothesis in emerging markets: evidence from India

Abstract

This study addresses the question of whether the adaptive market hypothesis provides a better description of the behaviour of emerging stock market like India. We employed linear and nonlinear methods to evaluate the hypothesis empirically. The linear tests show a cyclical pattern in linear dependence suggesting that the Indian stock market switched between periods of efficiency and inefficiency. In contrast, the results from nonlinear tests reveal a strong evidence of nonlinearity in returns throughout the sample period with a sign of tapering magnitude of nonlinear dependence in the recent period. The findings suggest that Indian stock market is moving towards efficiency. The results provide additional insights on association between financial crises, foreign portfolio investments and inefficiency.JEL codesG14; G12; C12

Investor Sentiment and Stock Market Volatility: Evidence from India

“…Our results provide inextricably linked practical insights to the traders and investors in the emerging stock markets such as India. Hiremath and Kamaiah (2010) and Hiremath and Kumari (2014) show significance deviation of Indian stock market from efficiency and hints at behavioral factors that explain the deviation. However, they do not provide a rigorous explanation based on investment.…”

Behavioural finance perspectives on Malaysian stock market efficiency

“…Taken together, the investor and price formation behaviour will form an adaptive efficient market as described by AMH (Lo, 2004(Lo, , 2005(Lo, , 2012) that prescribed the dynamic behaviour of financial markets due to a complex combination of investor behaviour across time and circumstances that are adapting to information and technological changes (Nawrocki & Viole, 2014). While AMH is still in infancy stage, the theory's validity is supported by empirical research from both developed and emerging financial markets (see Hiremath & Kumari, 2014;Kim, Shamsuddin, & Lim, 2011;Lo, 2004;Todea, Ulici, & Silaghi, 2009;Urquhart & Hudson, 2013;Verheyden et al, 2015). The current research offers a different theoretical and methods to examine the AMH validity.…”

Time-Varying Return Predictability in the Chinese Stock Market

“…There are a few studies investigating the adaptive markets hypothesis through the stock returns predictability in several markets, such as the Indian market 25 and the U.S. market. 34 However, similar analysis is rare for the Chinese market.…”

“…In this vein, moving windows are usually adopted in most studies to depict the detailed dynamics of return predictability. First, there are numerous methods suitable for investigating possible linear dependence of return time series, 25,34,54 such as the portmanteau Q statistic, 40 the AR model, 27 the runs test, 12 and the variance ratio test. 43 Second, there are also methods for testing nonlinear dependence in return time series, 25,34,38,39,54 such as the test for ARCH e®ect, 47 Tsay's test, 53 the ARCH Lagrange multiplier test, 16 the bicorrelation test, 24 Broock et al test, 8 and the generalized spectral test.…”

“…First, there are numerous methods suitable for investigating possible linear dependence of return time series, 25,34,54 such as the portmanteau Q statistic, 40 the AR model, 27 the runs test, 12 and the variance ratio test. 43 Second, there are also methods for testing nonlinear dependence in return time series, 25,34,38,39,54 such as the test for ARCH e®ect, 47 Tsay's test, 53 the ARCH Lagrange multiplier test, 16 the bicorrelation test, 24 Broock et al test, 8 and the generalized spectral test. 17 Third, there are econophysical methods for the test of long-range dependence by estimating the Hurst index, 26 such as the rescaled range analysis [44][45][46] the structure function approach, 14,15 the detrending moving average analysis, 1,9,22 the detrended°uctuation analysis, 29,31 and so forth.…”