A Test of the Adaptive Market Hypothesis using a Time-Varying AR Model in Japan

TL;DR

This paper tests the adaptive market hypothesis in Japanese stock markets using a time-varying AR model, revealing that market efficiency varies over time and differs between the TOPIX and TSE2 indices.

Contribution

It introduces a time-varying AR model approach to empirically test the adaptive market hypothesis in Japanese stock markets.

Findings

Market efficiency changes over time in both markets.

TSE2 has lower efficiency than TOPIX in most periods.

TOPIX's efficiency has evolved, TSE2's has not.

Abstract

This study examines the adaptive market hypothesis (AMH) in Japanese stock markets (TOPIX and TSE2). In particular, we measure the degree of market efficiency by using a time-varying model approach. The empirical results show that (1) the degree of market efficiency changes over time in the two markets, (2) the level of market efficiency of the TSE2 is lower than that of the TOPIX in most periods, and (3) the market efficiency of the TOPIX has evolved, but that of the TSE2 has not. We conclude that the results support the AMH for the more qualified stock market in Japan.