The Adaptive Markets Hypothesis Provides New Insights Into the Efficiency of Small Stock Markets : Evidence From Finland

In this paper, we explore whether the adaptive markets hypothesis (AMH) describes the efficiency of the Finnish stock market better than the efficient markets hypothesis (EMH) does. Building on this, we also test how small market size and market liberalisation impact the efficiency of the Finnish stock market and whether the relationship between market volatility and return varies in this market. We conduct this study by applying the subsample analysis and the rolling window analysis to the daily returns of the OMXH25 index and by measuring the efficiency through three linear predictability and two nonlinear predictability tests. The results of our study strongly support the AMH. They also suggest that small market size alone does not make a market less efficient; opening a market to foreign investors improves its efficiency after a delay; and the correlation between market volatility and return varies over time in the Finnish stock market, being usually negative. These findings mostly contradict the traditional investment paradigm