Behavioral Dynamics and Market Adaptation: Cross-Country Empirical Evidence of The Adaptive Market Hypothesis

Omar, Mohamed Hussien Abd El-Razeek; Hammad, Jana Alaa El-Din Salah; El-Behairy, Omar Hussien; El-Tohami, Shahd Ahmed; Mohamed, Tarek Ibrahim

doi:10.21608/ajsc.2025.393254.1005

Behavioral Dynamics and Market Adaptation: Cross-Country Empirical Evidence of The Adaptive Market Hypothesis

Document Type : Original research

Authors

¹ Assistant Professor, Department of Finance and Accounting, International Academy for Engineering and Media Science (IAEMS), Egypt

² Bachelor’s Degree Holder in Finance and Accounting, International Academy for Engineering and Media Science (IAEMS), Egypt

10.21608/ajsc.2025.393254.1005

Abstract

This paper explores the Adaptive Market Hypothesis (AMH) across nine MENA-region markets, as well as, offering an empirical validation of market adaptability. While efficient market hypotheses posit constant market efficiency, AMH suggests that market efficiency is dynamic; evolving in response to economic shifts, investor learning, and market behavior. It employs an analytical framework to daily time-series data spanning 15 years from nine MENA-region financial markets, enabling a robust evaluation of market adaptability across varying economic cycles. It integrates Markov Switching Models (MSM) to detect regime shifts, Momentum Strategies to evaluate trend persistence, and Long Short-Term Memory (LSTM) neural networks to forecast price movements and validate market adaptability. The results revealed significant evidence of time-varying market efficiency across all nine markets, with observable regime-switching behavior detected through Markov Switching Models (MSM). These models successfully captured transitions between efficient and inefficient states, highlighting periods of volatility and stability that align with AMH predictions. Momentum Strategies, particularly the 250-day variant, outperformed the Buy & Hold strategy during specific market phases, suggesting exploitable inefficiencies. Furthermore, LSTM models, when adjusted for regime states identified by MSM, demonstrated enhanced predictive accuracy, capturing nonlinear dynamics and transitions reflective of adaptive market behavior. This paper contributes to the adaptive portfolio management, strategic trading, and policy formulation in emerging and frontier MENA markets. It introduces a structured, multi-layered analysis of market adaptability, empirically validates AMH in underexplored MENA markets, and sets the stage for adaptive investment models capable of real-time adjustments.

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