Market Efficiency and Anomalies 

Topics: Stock market, Fundamental analysis, Stock Pages: 1 (1478 words) Published: July 9, 2014
FINC3017 Investments and Portfolio Management 
Essay: Market Efficiency and Anomalies 
 
Topic:Stock price momentum: Jegadeesh and Titman (1993)   Momentum anomaly and EMH 
Anomaly is a stock return deviation that challenge efficient market hypothesis (EMH). Jegadeesh and Titman (1993) theorise price momentum anomaly in the stock market for the first time. It contradicted to efficient market hypothesis thereby is widely debated. EMH states that no consistent excess return can be achieved since security prices fully reflect all available information (Fama 1970). Therefore, future prices cannot be predicted through technical analysis of past prices. If the hypothesis is true, passive investment strategy ought to be taken, because it is impossible to get abnormal return by aggressive trading.   However, Jegadeesh and Titman show that stocks performed well over the previous 3 to 12 months tend to continue to perform well over 3 to 12 months holding periods. Buy past winners and short past losers earned statistically significant positive return of averaging 12.01% per year. Predictable price patterns and excess returns contradict the efficient market hypothesis. Investors and fund managers perform actively in pursuing abnormal profits.    Literature review and the reason of anomaly ...
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