Adaptive markets hypothesis and economic-institutional environment: a cross-country analysis

Purpose This study's goal was to identify how several markets have developed over time and what determinants have influenced this process, based on adaptive markets hypothesis (AMH). In this regard, the authors consider that agents are driven by the seeking for abnormal returns to stay alive and their environment could somehow modify their decision-making processes, as well as influence the degree of efficiency of the market.Design/methodology/approach The authors collected the daily closing-of-the-market index from 50 countries, between 1990 and 2022. The sample includes emerging countries, developed countries and frontier markets. Then, the authors ran multilevel modeling using Hurst exponent as an informational efficiency metric estimated by two different moving windows: 500 and 1,250 observations (approximately 2 and 5 years).Findings The results indicate that the efficiency of the markets is not constant over time. The authors also have identified that markets follow a cyclical pattern of efficiency/inefficiency, and they are currently in a period of convergence to efficiency, possibly explained by the increase in computational capacity and speed of the available information to agents. In addition, this study identified that country characteristics are associated with market efficiency, considering institutional factors.Originality/value Studies of this nature contribute to the literature, considering the importance of better comprehension of market efficiency dynamics and their determinants, specially observing other theories on the relationship between information and markets (like AMH), which work with other investor assumptions than those used by efficient market hypothesis.

Automated summary

The purpose of this study was to examine the development of several markets over time and the factors influencing this process based on the adaptive markets hypothesis (AMH). The authors collected daily market index data from 50 countries between 1990 and 2022, and found that market efficiency is not constant and follows a cyclical pattern. The study also identified that country characteristics, particularly institutional factors, are associated with market efficiency.