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How exactly do markets adapt? Evidence from the moving average rule in three developed markets

Urquhart, Andrew; Gebka, Bartosz; Hudson, Robert


Andrew Urquhart

Bartosz Gebka


The seminal study by Brock, Lakonishok and LeBaron (1992) (BLL hereafter) found that the moving average rule had strong predictive power over 90 years in the DJIA, and this result was confirmed by Hudson et al. (1996) for the FT30 in the UK and Chen et al. (2009) for the TOPIX in Japan. However, according to the Adaptive Market Hypothesis, trading rules are only likely to be successful for a limited period of time and, as investors and markets adapt, their predictive power will diminish. We examine the moving average (MA) rule using post-BLL (1987-2013) data and find that after 1986 the rule’s predictive power has diminished in all three markets. We investigate the exact process behind the weakening of the predictive power of moving average rules and find that post-1987 markets react to new buy/sell signals not on the days those signals are generated, but the day before. In support of this finding, we show that trading strategies based on anticipation of signals would have yielded superior profits to investors. Hence, trading on anticipated signals constitutes a feasible explanation of price reactions to future, one-day-ahead new signals, and thus in line with the Adaptive Market Hypothesis.


Urquhart, A., Gebka, B., & Hudson, R. (2015). How exactly do markets adapt? Evidence from the moving average rule in three developed markets. Journal of International Financial Markets, Institutions and Money, 38, 127-147.

Journal Article Type Article
Acceptance Date May 14, 2015
Online Publication Date May 29, 2015
Publication Date 2015-09
Deposit Date Jun 1, 2015
Publicly Available Date Jun 1, 2015
Journal Journal of international financial markets, institutions and money
Print ISSN 1042-4431
Electronic ISSN 1042-4431
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 38
Pages 127-147
Keywords Technical analysis, Adaptive market hypothesis, Market efficiency, Predictability
Public URL
Publisher URL
Additional Information Authors' accepted manuscript of article published in: Journal of international financial markets, institutions and money, 2015 at


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Copyright Statement
© 2015, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

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