The Adaptive Markets Hypothesis

Adaptive Market Hypothesis: Evidence from three centuries of UK data

“…Urquhart and McGroarty (2016) examined the predictability of returns in four markets (S&P 500, FTSE100, NIKKEI225 and EURO STOXX 50) using variations of the VR test, in addition to the BDS test. They found evidence that return predictability varies over time across different markets, which is consistent with the fourth implication specified by Lo (2004Lo ( , 2005. They also found that certain conditions in the market are more auspicious in producing periods of significant predictability.…”

“…According to Lo (2004), advocates of EMH believe that market forces will bring prices back to normal and rational levels, which in turn implies that the impact of behavioral biases and the irrationality of investors are generally inconsequential and immaterial. Even though the concept of EMH, where market prices rationally incorporate information, is over 45 years old, various alternative ideas emerged as a result of the introduction of behavioral economics discipline arguing that markets and its participants are not rational but rather driven by other factors such as greed, fear and other behavioral biases.…”

“…Even though the concept of EMH, where market prices rationally incorporate information, is over 45 years old, various alternative ideas emerged as a result of the introduction of behavioral economics discipline arguing that markets and its participants are not rational but rather driven by other factors such as greed, fear and other behavioral biases. Lo (2004) introduced a new framework that complements the EMH with behavioral aspects by applying an evolutionary approach to economic interactions. Lo named this reconciliation the Adaptive Markets Hypothesis (AMH).…”

Investment Management: A Science to Teach or an Art to Learn?

“…Andrew Lo (2004), professor of finance and director of the Laboratory for Financial Engineering at MIT, developed what he calls the "adaptive market hypothesis." He argues that markets are not static but that they evolve continuously, not only under the pressure of exogenous events but also because of the competitive action of market participants.…”

The syntax of stock selection: Grammatical Evolution of a stock picking model

“…There is an extended literature however on the dynamic nature of financial markets and time varying risk premia. The Adaptive Market Hypothesis [12] proposes a competitive market with strategies constantly evolving, competing and interacting with market conditions. A natural extension of the work in this paper would be to incorporate these dynamics in evolving models for different market conditions.…”