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The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market

FRB of St. Louis Working Paper No. 2006-046B

52 Pages Posted: 8 Aug 2006  

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Paul A. Weller

University of Iowa - Department of Finance

Joshua Ulrich

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: April 13, 2009

Abstract

We analyze the intertemporal stability of returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously published 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 mid-1990s for filter and moving average (MA) rules. Returns to less-studied rules, such as channel, ARIMA, genetic programming and Markov rules, also have declined, but have probably not completely disappeared. The volatility of returns makes it difficult to estimate mean returns precisely. The most likely time for a structural break in the MA and filter rule returns is the early 1990s. These regularities are consistent with the Adaptive Markets Hypothesis (Lo, 2004), but not with the Efficient Markets Hypothesis.

Keywords: technical analysis, foreign exchange, structural break, market efficiency, adaptive markets hypothesis

JEL Classification: F31, G14, G11

Suggested Citation

Neely, Christopher J. and Weller, Paul A. and Ulrich, Joshua, The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market (April 13, 2009). FRB of St. Louis Working Paper No. 2006-046B. Available at SSRN: https://ssrn.com/abstract=922345 or http://dx.doi.org/10.2139/ssrn.922345

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

Paul A. Weller

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States
319-335-1017 (Phone)
319-335-3690 (Fax)

Joshua Ulrich

affiliation not provided to SSRN ( email )

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