Testing adaptive market hypothesis in Borsa İstanbul 100

Adaptive Markets Hypothesis is one of the most popular theories in recent years through its holistic approach reconciling Effective Markets Hypothesis with Behavioral Finance. Under the Adaptive Markets Hypothesis functioning of financial markets could be explained by the evolutionary principles. The market efficiency is time varying therefore the degree of return predictability in the markets changes over time. The aim of this study is to investigate the validity of the Adaptive Market Hypothesis for Turkish financial markets. For this purpose, daily and monthly returns of BIST 100 index are investigated by linear and nonlinear methods over the periods from January 1988- December 2017. Three linear variance ratio tests (Chow Denning, Joint Rank and Joint Sign) and nonlinear BDS test are used. These tests are applied to the sub-samples obtained by fixed length rolling window method to research time varying predictability degree of the market. Afterwards whether the degree of return predictability is affected by market conditions is investigated. According to findings the market efficiency is varying over time for the different frequency data and market conditions effect return predictability. Adaptive Market Hypothesis is valid in Turkish financial markets.