Adaptive Markets Hypothesis

Abstract

The purpose of the study is to critically examine the empirical evidence of Efficient Market Hypothesis (EMH) that pose challenges to the concept of perpetual informational efficiency of financial markets and to provide a context in which a better understanding of behavioural biases can be attained through the evolutionary perspective provided by Adaptive Market Hypothesis (AMH). The defence proffered to various anomalies of EMH has been examined and the weaknesses in the justification provided to reinstate the confidence in the concept of informational efficiency of markets have been re-emphasized. We find that EMH is a description of an ideal scenario of stock market functionality; however, real world is rarely as ideal. Financial markets are a creation of human beings without any restrictions to the selection of market participants. EMH is very abstract in its framework and does not accommodate the possibility of an alternative to informational efficiency in which market inefficiency can persist. It is observed that AMH provides a better financial paradigm than EMH to describe the behaviour of stock returns.