Does the Adaptive Market Hypothesis explain the evolution of emerging markets efficiency? Evidence from the Moroccan financial market

Abstract

This paper scrutinizes different aspects of the Adaptive Market Hypothesis (AMH) in the Moroccan financial market over the period from January 1992 to September 2019 through different approaches. On the basis of daily returns on MASI index, we measure the evolution of efficiency degree based on the linear and nonlinear tests with rolling window. One of the practical implications of the AMH is that the profit opportunities arise from time to time depending on the degree of market efficiency and according to market conditions. To investigate this implication, we track the evolving performance of momentum-based trading strategies and the extent to which this performance is related to the market efficiency degree and certain market conditions. The linear and nonlinear tests reveal that the efficiency degree is time-varying. Moreover, we find via momentum test that profit opportunities appear from time to time and disappear once they are exploited. Interestingly, the momentum profits depend on both the degree of market efficiency and some market conditions. Thus, the investors can capitalize on the inefficiency and certain market conditions using trading strategies such momentum. Overall, our findings are consistent with the AMH framework, which is proved to be a better explanation of the behavior of emerging markets than the Efficiency Market Hypothesis (EMH).

Quantifying Information Flows among Developed and Emerging Equity Markets

“…Lo [45,46] asserts in the AMH that markets evolve according to varying degrees of efficiency. Adaption, innovation, competition, and mutation result in a decrease and increase in the intensity of market efficiency due to varying market conditions [47,48]. e implication of the AMH for investors is that opportunities for profits evolve, which should affect the timing of implementing strategies, justifying the importance of active portfolio management.…”

Time-frequency domain analysis of investor fear and expectations in stock markets of BRIC economies

“…Also, the adaptive market hypothesis (AMH) engineered by Lo (2004) suggests that markets evolve -due to events and structural changes, adapt -and market efficiency varies in degree at different times. The AMH has been revealed by Lekhal and El Oubani (2020) The study contributes to literature in many ways. We investigate the comovements between the constituents of the BRIC stock markets and the BRIC index via the bi-wavelet technique.…”

“…Also, the adaptive market hypothesis (AMH) engineered by Lo (2004) suggests that markets evolve – due to events and structural changes, adapt – and market efficiency varies in degree at different times. The AMH has been revealed by Lekhal and El Oubani (2020) to be essential within financial markets of emerging economies, and thus, assessed to be time-varying. Therefore, time-frequency domain analysis contributes to the reduction of weak signals to maintain the true signals ( Owusu Junior, Adam and Tweneboah, 2020 ; Asafo-Adjei et al., 2021 ).…”

Adaptive Market Hypothesis and Return Predictability: A Hidden Markov Model Application in Borsa Istanbul

“…The analysis provided results in favour of the AMH. Lekhal & El Oubani (2020) examined various aspects of the AMH by using daily data of the Moroccan stock market index MASI with linear (WBAVR, automatic portmanteau, and the TV-AR model) and nonlinear (MacLeod-Li and the momentum returns) tests. The results confirmed the profit opportunities along with return predictability in this market, hence supported the AMH.…”