Evidence that financial markets are efficient sometimes and inefficient most of the times
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The issue of market efficiency attracted the attention of academicians since the existence of financial markets. Over time, two schools of thoughts were established: the efficient markets school and the behavioral finance school. Proponents of the former believed in the Efficient Markets Hypothesis whereas the latter brought evidence from psychology neurosciences to demonstrate the irrationality of investors in making financial decisions. Recently, an adaptive hypothesis was suggested. This paper proves mathematically the existence of this adaptability process and tests empirically its validity. The results support the adaptability process, namely that markets are indeed efficient sometimes and inefficient most of the time. Keywords: Efficient Markets Hypothesis, Behavioral Finance, Adaptive Markets Hypothesis, Smooth transition regression models, Threshold models, regime switching models, Financial Markets, Irrationality, S&P500, Market-to-Book ratio.
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