The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market

By Christopher J. Neely, Paul A. Weller, Joshua M. Ulrich. Journal of Financial and Quantitative Analysis, 2009

265 citations recorded by the source corpus.

Abstract We analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously studied rules. The excess returns of the 1970s and 1980s were genuine and not just the result of data mining. But these profit opportunities had disappeared by the early 1990s for filter and moving average rules. Returns to less-studied rules also have declined but have probably not completely disappeared. High volatility prevents precise estimation of mean returns. These regularities are consistent with the Adaptive Markets Hypothesis (Lo (2004)), but not with the Efficient Markets Hypothesis.

Subfields: Economics and Econometrics, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/92c9fbb89f03119a7141a198be1751aac3f65322

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Citations in the corpus

Testing the Predictive Ability of Technical Analysis Using a New Stepwise Test Without Data Snooping Bias (2010, background): “1 Neely, Weller, and Ulrich (2007) also suggest that the weakening technical predictability in foreign”
Sparse and Stable Portfolio Selection With Parameter Uncertainty (2015, unknown): “Following Neely, Weller, and Ulrich (2009), among others, we estimate a simple time trend of the proportional bid-ask spread over the out-of-sample evaluation period.”
A Forex trading system based on a genetic algorithm (2012, background): “Recent evidence shows that, by the mid 1990s, proﬁt opportunities presented by some popular classes of technical trading rules had either disappeared or signiﬁcantly declined (LeBaron 2002; Neely and Weller 2003; Olson 2004; Park and Irwin 2007; Schulmeister 2008; Neely et al. 2009).”
The Evolution of Stock Market Efficiency Over Time: A Survey of the Empirical Literature (2011, result): “Neely et al. (2009) note that these empirical regularities are consistent with the AMH.”
Stock return predictability and the adaptive markets hypothesis: Evidence from century-long U.S. data (2011, unknown): “As measures of return predictability, we use Our finding complements recent study by Neely et al. (2009) who report the evidence in favour of the adaptive markets hypothesis for the foreign exchange market in the context of profitability of technical trading rules.”
Currency Momentum Strategies (2012, unknown): “…rules were temporarily profitable but that their profits often tend to deteriorate over time as more traders learn about these strategies and start to 1 exploit them (e.g., Levich and Thomas III, 1993; Pukthuanthong-Le, Levich, and Thomas III, 2007; Neely, Weller, and Ulrich, 2009, among others).”
Assessing the Efficacy of Adjustable Moving Averages Using ASEAN-5 Currencies (2016, background): “Nevertheless, many have also highlighted the existence of a slowmoving downtrend for this kind of profitability over the last decade [24], [25], [26].”
Investing in low-carbon transitions: energy finance as an adaptive market (2017, background): “Where AMH scholars have often utilised large-n statistical methods to test market efficiency based on rapidly traded commodities (Kim, Shamsuddin, & Lim, 2009; Neely et al., 2009), this would be impossible for RE finance as no publicly quoted exchange or secondary market currently exists.”
Beyond the Carry Trade: Optimal Currency Portfolios (2015, background): “Neely, Weller, and Ulrich (2009) document a similar decline over time of the pro tability of technical trading analysis rules in the currency market.”
Expert Systems With Applications (unknown): “Indeed, Neely, Weller, and Ulrich (2009) who examined the evolution over time of the excess returns of technical trading rules, assert that they decline over time and that by mid-1990 s proﬁt opportunities from MA rules had disappeared.”