A Literature Review on the Evidence and Limitation for the AMH Theory

Abstract

It remains a challenge for the Adaptive Market Hypothesis (AMH) to reconcile Efficient Market Hypothesis (EMH) with behavioural finance. This paper reviews many previous papers and examines AMH whether it is consistent with real changes in markets. By examining previous studies on the relationship between AMH and EMH, this paper summarizes the efficiency of different types of markets in different countries to prove Adaptive Market Hypothesis. In most stock markets, bond markets, foreign exchange markets and other relevant markets, the changes of efficiency overtime are consistent with implication of AMH. However, there are still limitations of AMH which cannot well explain the efficiency of crude oil markets. Furthermore, it is criticized being a qualitative model instead of a quantitative model. This research enables us to better understand the theory of AMH as well as its application and limitation.