Research On The Adaptability Of Stock Market Based On Multifractal Theory

With the stock market becoming more and more mature,the classical economists believe that investors are rational and efficient.However,behavioral economists believe that they are irrational and inefficient,which result in economic bubbles and financial crises.Researchers who adhere to these two theories are called the Effective Market Hypothesis school and the Behavior Financial school respectively.For a long time,the two schools have been in heated debates with the topic that whether the investment management and financial regulation are effective.Although the two views have a certain theoretical basis,they all have certain flaws:the Efficient Market Hypothesis has flaws that many financial anomalies cannot be explained in the market,and the market is insufficiently motivated.Although Behavior Financal points out that market anomalies are coming from human behavior deviations,it is still difficult to give a unified framework.Under the collision of thought-sparks,the Adaptive Market Hypothesis came into being.Andrew W.Lo compares the ecological environment with the financial market environment.In 2004,he proposed the Adaptive Market Hypothesis.From the perspective of adaptive evolution,he explained how to shape the capital market and study the behavior in the financial field.This hypothesis communicates the efficient market hypothesis and behavioral finance,and it explains well the volatile behavior of crises and stability,profits and losses in the market.The Adaptive Market Hypothesis neither denies the analysis model and premise of the Efficient Market Hypothesis,nor does it deny the limitation of Behavior Finance to people.It emphasizes that reason is a relative concept,which is related to the external environment and constantly changing.Participants' behavior will show irrationality due to changes in the environment,and it will gradually disappear with the environment's changing and finally becomes a rational person.The adaptive market hypothesis solves the differences between the two schools of thought and enables financial markets to be analyzed in a holistic framework.In the terms of theoretical research,this paper reviews the Effective Market Hypothesis,Behavior Finance,and Adaptive Market Hypothesis.Studying the differences and connection between the Efficient Market Hypothesis and Behavior Finance,and analyzing the shortcomings of those theories.Based on this,the paper will introduce the Adaptive Market Hypothesis combined with Darwin's biological evolution theory,and study how the Adaptive Market Hypothesis is reflected in the stock market.What's more,analyzing the internal causes of the market,and describing its theoretical development and progress.When it coming to empirical research,based on the multifractal theory,this paper innovatively uses this perspective.Take China as the representative of the emerging stock market,the United States as the representative of the mature stock market,this paper makes an empirical study on the adaptive characteristics of the adaptive market hypothesis in two representative markets.For this feature study,this paper mainly from three test criteria:(1)market efficiency effectiveness(2)return predictability(3)the relationship between return and risk.In terms of market efficiency effectiveness,this paper uses the multifractal detrended fluctuation analysis(MF-DFA)to calculate the Generalized Hurst Index,and construct A-DME to measure the market efficiency.It also uses the sliding window method from comprehensive and local aspects to analyze the efficiency of the stock market.From a local perspective,the efficiency of the stock market is in an alternating cycle of high and low,and there is a certain cyclical change in the efficiency of the market,which indicates that the stock market conforms to the characteristics of the adaptive market hypothesis.In terms of the predictability of returns,this paper adopts OLS least squares regression analysis,selects market environment indicators,and studies the impact of interactive environment of dynamic stock market on stock market returns,and concludes that the impact of market environment on returns is relatively significant.Although it is impossible to judge the size of profits,but can predict the future trend of change to adjust the investment strategy.At the same time,according to the index of multifractal structure,it is concluded that the predictability of returns is time-varying,which conforms to the adaptive market hypothesis.Talking with the relationship between risk and return,the model GARCH-M and MF-R model are used in this paper.No scholars have applied multifractal analysis to the relationship between return and risk which aims to explore the market's adaptive characteristics.This paper uses the singular spectrum function in multifractal theory to conduct multifractal spectrum analysis and doing quantitative analysis of risk.Constructing MF-R model,and using sliding window method to explore the relationship between return and risk.Through the construction of the two models,this paper finds that the relationship between return and risk is not static.It is time-varying and cyclical.This shows that people are constantly adapting to the investment environment in investing behaviors and market selection,which is consistent with the theory of the Adaptive Market Hypothesis.