Financial Crises and Adaptive Market Hypothesis: An Evidence from International Commodities traded at New York Stock Exchange

Abstract

This study evaluates the varying degree of predictability of commodities return through empirical analysis of AMH (Adaptive Market Hypothesis). We divide daily returns data (from 1996 to 2013) of commodities indices (Gold, Metal, Oil& Silver) into different crisis periods. We subject all the subsamples to linear/nonlinear tests to reveal how market efficiency (independency of returns) has behaved over time. All the linear (except variance ratio) and nonlinear tests are evident that commodity indices returns have been predictable (dependent) in some crisis periods while unpredictable (dependence) in the others thus consistent with the implication of AMH. Therefore, commodities markets are adaptive markets. The findings suggest the behavior of commodities’ markets is best explained by AMH than conventional/traditional EMH (Efficient Market Hypothesis).

COVID-19 and adaptive behavior of returns: evidence from commodity markets

“…However, an increasing trend is observed in the average volatility of stock markets in the US, the UK, and Germany while COVID-19 moves from epidemic to pandemic. Shahid et al ( 2020a ) find that commodity markets go under periods of significant predictability and no predictability due to various crises prevailing in the market, which supports AMH. Okorie and Lin ( 2021 ) find the fractal contagion effect of the COVID-19 pandemic on the stock markets.…”

“…Earlier debate detects linear dependency in return series from commodities through conventional linear tests. Amini et al ( 2010 ) report that in the absence of linear dependencies, the returns series still may have some non-linear serial dependencies that gained attention in the literature (Urquhart and Hudson, 2013 ; Ghazani and Araghi, 2014 ; Shahid et al, 2020a ). Inherent nonlinearity is the primary characteristic of time series, so the following non-linear methods are more consistent to test the commodity markets’ efficiency by determining the levels of dependencies in the series compared to traditional linear methods (Alharbi, 2009 ).…”

Time-Varying Return Predictability and Adaptive Behavior in The U.S. Commodity Markets During COVID-19

“…Among the vast investment avenues available, commodities are a distinct asset class that enriches portfolio selection and management. Different aspects of commodities have received sufficient attention from researchers (see Urquhart, 2017;Shahid et al, 2020). One of the intriguing concerns has been commodity market efficiency, which deals with the predictability of commodity market prices in financial markets.…”

“…The literature on commodities uses a variety of econometric models and the focus of interest is to detect predictability through EMH (Urquhart et al, 2013;Urquhart, 2017).The hypothesis (AMH) proposed by Lo (2004) has largely been ignored in the commodities literature (Shahid et al, 2020). AMH is an enhanced form of EMH to investigate the varying levels of predictability in returns.…”

“…This paper enhances the existing body of knowledge on AMH and commodities as i) it investigates the returns from most popular and commonly traded commodities on CBOE, ii) it examine the returns from timevarying perspectives using AMH, iii) it examines the linear and non-linear predictability for commodities over a longer period, iv) it uncovers the profitable opportunities through adaptive behavior of returns and v) it explores the predictability of returns during COVID-19 period. Though Shahid et al (2020) investigate the linear and nonlinear predictability of the commodities, their study is limited to crises periods only, while a longer period and sub-samples analysis may provide better results.…”