Thursday, 27 June 2013

STOCK RETURN PREDICTABILITY AND ADAPTIVE MARKET HYPOTHESIS

12:13 |



 
STOCK RETURN PREDICTABILITY AND ADAPTIVE MARKET HYPOTHESIS:
EVIDENCE FROM NIGERIAN STOCK EXCHANGE

Abstract

The Efficient Market Hypothesis (EMH) has dominated the finance literature and has provided a great insight into the activities of stock markets. It argues that returns are not predictable because markets are informationally efficient. The idea of an efficient market has generated a lot of arguments with empirical evidences against it. A new hypothesis - Adaptive Market Hypothesis (AMH) challenges some of the views of EMH and argues that arbitrage opportunities exist, and efficiency changes with change in market conditions. Based on this, the study examines the Nigerian Stock Exchange to find out whether return is predictable using Automatic Variance Ratio and predictive regression. It has been identified in this research that, the market was inefficient for the period between1985 and 2010 with return being predictable by economic fundamentals, like interest rate, inflation rate, divided yield, financial crisis and government policies with statistic significance. However, the cyclic pattern of efficiency was not observed due to short-period duration for the work compared to other earlier studies. It is therefore, recommended that investors, regulations and academicians should not completely depend on the general belief that markets are always efficient. This usually leads to negligence or non-payment of attention to fundamental and intrinsic value of stocks. The concept of an adaptive market better explain the nature of market. There could be period of efficiency and inefficiencies, with period where investors could outsmart the market and gain in excess of average market returns.

Keyword: return predictability, Efficient market and Adaptive Market Hypotheses.



Suleiman A.S Aruwa, PhD
Abdullahi O. Musa

Abdulll2001@yahoo.co.uk
FOR COMPLETE ARTICLE CLICK BELOW
https://docs.google.com/file/d/0B6MachyvRY4jTnh3VjNFQTNnaUE/edit?usp=sharing

 
 



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