Behavioral Economics Approach to Capital Market with Emphasis on Adaptive Market Hypothesis

This study investigates the behavior and trend of prices in the Tehran Stock Exchange based on the behavioral economics perspective. In this regard, the Adaptive market hypothesis has examined as a substitute for the classical efficient market hypothesis. For this purpose, the index data of the top 50-companies were used as a representative of the total market from January 2008 to July 2018 based on the daily closing prices. To test the Adaptive Market Hypothesis, in the first step, the market performance evaluated using BDS, structural breaks, and unit root tests. Besides, the multiple variance ratio tests used to test the Adaptive market hypothesis. The results have shown that not only the market did not perform efficiently during the study period, but the BDS test results also confirmed the nonlinearity of the time series. The addition, the multiple variance ratio tests confirm the adaptive market hypothesis. This indicates that at least in some periods, it has been possible to predict price trends and gain exceed returns. It is also incorrect to conceive of market actors as a homogeneous set which is the principle of the efficient market hypothesis.