Narasimhan Jegadeesh and Sheridan Titman published their paper “Returns to buying winners and selling losers: Implications for stock market efficiency” at the Journal of Finance in 1993. They find that significant positive alphas can be obtained from strategies which buy past winning stocks – stocks that have performed well in the past – and sell past losing stocks - stocks that have performed poorly in the past. Such trading strategy is typically referred as momentum strategy and has been widely adopted by many money managers. If momentum strategies are indeed able to generate positive alphas after adjusting for risks, which form of EMH is violated?

Question

BlackTom AI · Accepted Answer

The key idea in this question is to map the empirical finding (positive abnormal returns from a rule that buys past winners and sells past losers) to the appropriate EMH form.
Option A: All of weak form, semi-strong form and strong form EMH. This is too strong a claim. If momentum profits exist, it does not automatically imply that all three forms are violated; the evidence is most directly about past price information, not about all possible public or insider information.
Option B: Weak form EMH only. This is the core idea: momentum strategies rely on patterns in past price information. If such strategies yield abnormal returns after any required risk adjustments, that challenges the notion that past price movements cannot predict future returns, i.e., it challenges the weak-form hypothesis. It does not by itself prove violations of semi-strong or strong forms, which involve broader sets of information (all public information, or all information including private) and may be consistent with some risk explanations or data-snooping concerns.
Option C: Semi-strong form EMH only. This would claim that even public information beyond past prices is unable to generate abnormal returns. Momentum uses primarily historical price data, which is a subset of public information; the finding does not inherently show that all other public information is useless, so this option overstates the claim.
Option D: Strong-form EMH only. This form asserts that even insiders cannot earn abnormal returns. Momentum evidence does not speak to insider information and hence does not pinpoint a failure of the strong form alone.
Option E: None of weak form, semi-strong form and strong form EMH. This would deny any EMH violation, which contradicts the basic implication of momentum research that past-price-based strategies can produce abnormal returns under certain conditions.
In sum, the finding that past-winners-past-losers strategies generate positive alphas after risk adjustment is most directly interpreted as a violation of the weak-form EMH, while it does not automatically entail violations of the semi-strong or strong forms based solely on this information.

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