Geopolitical and Institutional Constraints on Adaptive Market Efficiency -- A Feasibility Diagnostic for Robust Portfolio Construction
Roberto Garrone
TL;DR
This paper reframes market efficiency as an endogenous, state-dependent phenomenon that varies across assets and geographies due to institutional and geopolitical factors. It introduces the Geopolitical--Adaptive Efficiency Ratio (GAER), a cross-sectional diagnostic defined by $\text{GAER}_t = \frac{\sum_{i \in \mathcal{U}^{\mathrm{core}}_t} \mathrm{MC}_{i,t} G_{i,t} I_{i,t}}{\sum_{j \in \mathcal{U}_t} \mathrm{MC}_{j,t} G_{j,t} I_{j,t}}$, where $w_{i,t} := \mathrm{MC}_{i,t} G_{i,t} I_{i,t}$. GAER conveys the share of adaptive-efficiency-supporting mass concentrated in the core, serving as a slow-moving boundary condition rather than a return predictor. By grounding GAER in AMH, institutional economics, and political economy, the framework separates informational feasibility from execution and portfolio optimization, enabling constraint-aware modeling and universe conditioning without relying on forecast-driven signals. The paper provides a global illustrative snapshot and outlines practical diagnostic applications for universe selection, cross-market comparability, stress diagnostics, and factor-model feasibility, offering a principled bridge between macro-institutional context and applied portfolio methodology.
Abstract
This paper develops a structural framework for characterizing the informational feasibility of financial markets under heterogeneous institutional and geopolitical conditions. Departing from the assumption of uniform and time-invariant market efficiency, adaptive efficiency is conceptualized as a localized and state-dependent property emerging from the interaction between economic scale, institutional enforcement, and geopolitical embedding. To operationalize this perspective, the paper introduces the Geopolitical-Adaptive Efficiency Ratio (GAER), a descriptive cross-sectional indicator measuring the concentration of adaptive-efficiency-supporting mass within institutionally and geopolitically central assets. GAER is not a return-predictive signal, factor, or regime classifier. Instead, it functions as a diagnostic boundary condition, delimiting the domain in which ranking-based and robustness-oriented portfolio construction methods are plausibly applicable. The framework integrates insights from adaptive market theory, institutional economics, and political economy, linking disclosure continuity, liquidity provision, and enforcement credibility to the persistence of informational signals in asset prices. GAER is formalized, its theoretical properties are discussed, and its interpretation is illustrated using a global equity snapshot based on publicly observable information. The contribution separates informational feasibility from portfolio construction and execution, providing a conceptual foundation for constraint-aware financial modeling without reliance on forecast-driven assumptions or parametric optimization.