Adaptive markets hypothesis: An analysis for G-7 countries and new industrializing countries

The adaptive markets hypothesis which argues that market efficiency can be dynamic with the predictability of returns and may change over time, is a market hypothesis based on the concept of relative efficiency and combining the efficient markets hypothesis with behavioral alternatives to reveal a new framework. In this study the validity of the adaptive markets hypothesis in the stock markets of the G-7 and newly industrialized countries is tested, and a comparison is made between these two country classes in the context of market efficiency. The daily closing data of the stock markets of the aforesaid countries for the period from January 4, 2007 to November 15, 2022 are converted into return series and analyzed with both linear and non-linear methods. As linear methods ADF and PP tests, and as nonlinear methods MS-ADF test are used. According to the findings obtained as a result of the analysis, it is seen that the MS-ADF test gives better results than the linear unit root tests ADF and PP tests in representing the series. MS-ADF test results show that the null hypothesis of a unit root can be rejected in high volatility regime for stock markets of G-7 countries and newly industrialized countries. It also shows that the efficient markets hypothesis is valid only in low volatility regime for stock markets of G-7 countries and newly industrialized countries (except Mexico, Brazil and Malaysia). These results support the validity of the adaptive markets hypothesis on the stock markets of G-7 countries and newly industrialized countries (except Mexico, Brazil and Malaysia). Mexico, Brazil and Malaysia stock markets show that the null hypothesis can be rejected both in the high volatility regime and in the low volatility regime. The results show that these indexes are stationary in both regimes. This means that the weak form of the efficient markets hypothesis is not confirmed in both regimes as stock prices exhibit reversal characteristics, which does not support the validity of the adaptive markets hypothesis.