Adaptive market hypothesis and time-varying contrarian effect: Evidence from emerging stock markets of South Asia

Munir, Ali Fayyaz and Abd Sukor, Mohd Edil and Shaharuddin, Shahrin Saaid (2022) Adaptive market hypothesis and time-varying contrarian effect: Evidence from emerging stock markets of South Asia. SAGE Open, 12 (1). ISSN 2158-2440, DOI

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This study contributes to the growing debate on the relation between varying stock market conditions and the profitability of stock market anomalies. We investigate the effect of changed market conditions on time-varying contrarian profitability in order to examine the presence of the Adaptive Market Hypothesis (AMH) in South Asian emerging stock markets. The empirical findings reveal that a strong contrarian effect holds in all the emerging markets. We also find the stock return opportunities vary over time based on contrarian portfolios. We show that contrarian returns strengthen during the down state of market, higher volatility and crises periods, particularly during the Asian financial crisis. Interestingly, the market state instead of market volatility is the primary predictor of contrarian payoffs, which contradicts the findings of developed markets. We argue that the linkage arises from structural and psychological differences in emerging markets that produce unique intuitions regarding stock market anomalies returns. The overall findings on the time-varying contrarian returns in this study provide partial support to AMH. Another significant outcome of this study implies that investors in South Asian emerging markets, like investors in the developed markets, could not adapt to evolving market conditions. Therefore, contrarian profits often exist, and persistent weak-form market inefficiencies prevail in these markets.

Item Type: Article
Funders: None
Uncontrolled Keywords: Emerging stock markets; Reversals; Contrarian profits; Market condition; Adaptive market hypothesis
Subjects: H Social Sciences > H Social Sciences (General)
Divisions: Faculty of Business and Economics
Depositing User: Ms. Juhaida Abd Rahim
Date Deposited: 27 Jul 2022 04:47
Last Modified: 27 Jul 2022 04:47

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