The Review of Finance and Banking Volume 01, Issue 1, Year 2009, Pages 007—013 S print ISSN 2067-2713 online ISSN 2067-3825 ADAPTIVE MARKETS HYPOTHESIS: EVIDENCE FROM ASIA-PACIFIC FINANCIAL MARKETS ALEXANDRU TODEA, MARIA ULICI, AND SIMONA SILAGHI Abstract. In this paper we investigate the profitability of the moving average strategy on six Asian capital markets considering the episodic character of linear and/or nonlinear dependencies, the period under study being 1997-2008. For each market, the most profitable strategy from 15000 alternatives is selected. The main conclusion is that profitability of moving average strategies is not constant in time; it is episodic showing when sub-periods of linear and non-linear correlation appear. Thus, one can thus say that the degree of market efficiency varies through time in a cyclical fashion over time and these statistical features are in line with those postulated by Adaptive Markets Hypothesis (AMH) of Lo (2004, 2005). 1. Introduction Numerous recent studies have used the Hinich—Patterson windowed-test procedure (1995) to research the temporal persistence of linear and especially nonlinear dependencies on the emergent stock markets. Thus, Lim and Hinich (2005) in Asian Stock Markets, Bonilla et al. (2006) in Latin American Stock Markets and Todea and Zoicas-Ienciu (2008) in Central and Eastern Europe stock markets are emphasizing the existence of different stock price behaviors, namely long random walk sub periods alternating with short ones characterized by strong linear and/or nonlinear correlations. All these studies suggest that these serial dependencies have an episodic nature being also the main cause for the low performance of the forecasting models. In this context, Lim, Brooks and Hinich (2006) computed the bi-correlation statistics of Hinich (1996) in fixed-length moving sub-sample windows and found that nonlinear predictabil- ity for Asian emergent markets follows an evolutionary time path. The results of this test of evolving efficiencies are in line with those postulated by Adaptive Markets Hypothesis (AMH) of Lo (2004, 2005) according to which the profit opportunities do exist from time to time. In another study Lim, Brooks and Hinich (2007), relying on the same test, found that the cross- country differences in nonlinear departure from market efficiency can be explained by market size and trading activity, while the transient burst of nonlinear periods in each market can be attributed to the occurrence of economic and political events. Lim (2007) compute the bi-correlation statistics in rolling sample windows and ranking market efficiency from the per- centage of windows in which these statistics reject the random walk hypothesis. By a similar approach, Cajueiro and Tabak (2004) employed a rolling sample approach to compute the Hurst Received by the editors May 11, 2009. Accepted by the editors November 23, 2009. Keywords : episodic dependencies, bicorrelation test, technical analysis, adaptive market hypothesis. JEL Classification : C15, G11, G14. Alexandru Todea is Senior Lecturer at "Babes-Bolyai" University, Faculty of Economics Sciences and Business Administration, Department of Finance. E-mail: alexandru.todea@econ.ubbcluj.ro. Maria Ulici is Phd Student at "Babes-Bolyai" University, Faculty of Economics Sciences and Business Ad- ministration, Department of Finance. E-mail: maria.ulici@econ.ubbcluj.ro. Simona Silaghi is Lecturer at Oradea University, Department of Economics. E-mail: ssilaghi@uoradea.ro. This paper is in final form and no version of it will be submitted for publication elsewhere. c °2009 The Review of Finance and Banking 7