Perspectives: Adaptive Markets and the New World Order

Posted: 28 Mar 2012

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Date Written: March 26, 2012

Abstract

In the adaptive markets hypothesis (AMH) intelligent but fallible investors learn from and adapt to changing economic environments. This implies that markets are not always efficient but are usually competitive and adaptive, varying in their degree of efficiency as the environment and investor population change over time. The AMH has several implications, including the possibility of negative risk premiums, alpha converging to beta, and the importance of macro factors and risk budgeting in asset allocation policies.

Keywords: Behavioral Finance, Portfolio Management, Asset Allocation, Portfolio Concepts from Capital Market Theory, Efficient Market Hypothesis, Risk Management, Portfolio Risk Management

Suggested Citation

Lo, Andrew W., Perspectives: Adaptive Markets and the New World Order (March 26, 2012). Financial Analysts Journal, Vol. 68, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=2029242

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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