Adaptive Markets Hypothesis

The stock market of China has become one of the world’s most influential emergingmarkets since its running. Due to the investors’ irrational group behavior, large scale tradeinvestors’ heterogeneity, and imperfect market mechanism, there is the phenomenon of aboom collapsed, the ups and downs in the process of stock market’s development, whichseriously affects the healthy development of China’s stock market. To strengthen theconstruction of the stock market, keep its stable and healthy adaptability development, hasbecome the core problems needed to be resolved.Adaptive markets hypothesis is a combination of The Efficient Market Hypothesisand The Behavioral Finance, which explains financial vision from the perspective ofbiological evolution. Adaptive market hypothesis argues that market efficiency varies withchanges in market conditions with a lot of empirical studies on abroad mature markets.The starting point of this paper is whether the development of China’s stock market isfollowed the adaptive markets hypothesis.The empirical method in this paper using for check the market efficiency on theChina’s stock market, is dependent on the dynamic composite variance ratio test and theoverlapping moving window method. Through the analysis of the Z statistic, the resultsshow that, the market efficiency is invalid in the short term, and exists cyclical changeswith effectively and ineffective circulation in the medium. Also in the long term it is weakform efficient gradually. China’s stock market is gradually effective in the evolution ofdevelopment. The time-varying and cyclical changes response of market efficiencyrespond Adaptive Markets Hypothesis.Another important connotation of AMH is the time-varying and the interaction withdynamic market environment of market efficiency. Market efficiency can be measured asthe external manifestations of stock return predictability. When the market is valid, thestock market return is unpredictable; on the opposite, the stock market returns can bepredicted when the market is invalid. In this paper, we use regression analysis to explainthe effects of macro economy including the market crisis, policy change and somedynamic market environment changes for the predictability of the stock market. Resultsshow that when the policy change, the stock market return predictability is highlypredictable, such as financial crisis occurs, return predictability is declining. However, therelation between return predictability and the state of the market may not be exploited economically because it is difficult to predict crashes, the start and the end of bubbles, orthe timing and duration of a crisis. We find evidence that inflation, risk-free rates, and thePE are important factors that influence stock return predictability over time.Through the empirical analysis, we know that the market efficiency of China’s stockmarket existed time-varying and cyclical changes. It had interaction with dynamic marketenvironment and followed the Adaptive markets hypothesis. Combined with the AMHhypothesis, some suggestions are provided to the development of China’s stock market.