Adaptive Market Hypothesis Flashcards
Explain what is meant by the adaptive market hypothesis
the adaptive markets hypothesis is a financial theory that proposes that financial markets are driven by the collective behaviour of market participants.
this theory suggests that market participants act based on their perceptions and beliefs about the market, rather than on objective, hard facts. As a result, financial markets are constantly adapting to changes in investor behaviour, leading to changes in asset prices.
Analyse its relationship to behavioural finance
The AMH has been the subject if much debate and research in the field of behavioural finance. Behavioural finance is a field of study that seeks to understand the psychological factors that influence investor behaviours and how these factors can affect financial markets.
According to the AMH, financial markets are not always efficient, as traditional financial theory assumes, but instead, constantly adapting to changes in investor behaviour.
a discussion of the relevant empirical literature that as investigated the AMH
There has been a significant amount of empirical research investigating the adaptive market hypothesis. For example, a study by Barberis, Shelfier and Vinshny (1998) found evidence that investors beliefs and expectations can influence asset prices and that financial markets are not always efficient. Another study by Lo and Mackinlay (1990) found that stock prices tend to follow a pattern of momentum and reversal, which is consistent with the AMH’s view of constantly adapting markets.
Overall, the empirical literature on AMH suggests that financial markets are not always efficient, and that investor behaviour plays a significant role in shaping market outcomes. However, the relationship between the AMH and behavioural finance is still a subject of ongoing research and debate.
