Adaptive Market Hypothesis (Study of Assumptions)
6 Pages Posted: 7 Mar 2016 Last revised: 21 Dec 2017
Date Written: March 7, 2016
Adaptive Market Hypothesis (AMH) embraces Efficient Market Hypothesis (EMH) as an idealization that is economically unrealizable, but which serves as a useful benchmark for measuring relative efficiency. AMH’s adaptability to changing dynamics of the market suggests that investors are potentially capable of an optimal dynamic allocation. There is nothing wrong here in the direction pointed by Andrew Lo. However the assumption that human innovation driven adaptability is the way ahead is an open-ended solution. This leaves little room for system thinking and overrules the possibility that natural systems could explain human behavior rather than vice versa. AMH just like EMH is based on a set of assumptions, which are good for illustrating market idealizations but lack in terms of addressing contradictions. This makes both AMH and EMH a system philosophy rather than a system framework. Reversion Diversion Hypothesis (RDH) (Pal, 2015) reconciles the contradictory assumptions into a statistical framework that addresses the limitations of EMH, AMH and extends the idea of a natural system functioning to markets.
Keywords: Efficient Market Hypothesis, Information, Random Walk Hypothesis, Market Inefficiency, Adaptive Market Hypothesis, Reversion Diversion Hypothesis
JEL Classification: A00, A10
Suggested Citation: Suggested Citation