Random walk theory

(redirected from Random walk hypothesis)
Also found in: Dictionary, Acronyms, Wikipedia.
Related to Random walk hypothesis: Efficient market hypothesis

Random Walk Theory

An investment philosophy holding that security prices are completely unpredictable, especially in the short term. Random walk theory states that both fundamental analysis and technical analysis are wastes of time, as securities behave randomly. Thus, the theory holds that it is impossible to outperform the market by choosing the "correct" securities; it is only possible to outperform the market by taking on additional risk. Critics of random walk theory contend that empirical evidence shows that security prices do indeed follow particular trends that can be predicted with a fair degree of accuracy. The theory originated in 1973 with the book, A Random Walk Down Wall Street. See also: Efficient markets theory.

Random walk theory.

The random walk theory holds that it is futile to try to predict changes in stock prices.

Advocates of the theory base their assertion on the belief that stock prices react to information as it becomes known, and that, because of the randomness of this information, prices themselves change as randomly as the path of a wandering person's walk.

This theory stands in opposition to technical analysis, whose practitioners believe you can predict future stock behavior based on statistical patterns of prior performance.

References in periodicals archive ?
Comparisons of one period and multi period returns are used to test the random walk hypothesis and to confirm market efficiency.
The Runs test, is a non-parametric test in which the total number of sequences of consecutive positive and negative returns is tabulated and compared against its sampling distribution under the random walk hypothesis.
Testing random walk hypothesis for Indian stock market Indices.
With regard to Groenewold (1997) and Lee and Mathur (1999) conclusions, Worthington and Higgs (2004) tested the random walk hypothesis in 16 developed markets (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom) from December 1987 to May 2003 using serial correlation, runs, unit root and multiple variance ratio tests.
Laurence (1986) studied on the KLSE stock exchange in Malaysia and SES stock exchange in Singapore to find out the random walk hypothesis for the period 1973 to 1978.
Ahmad, Ashraf and Ahmed (2006) rejected the random walk hypothesis of nifty and sensex using parametric and non-parametric techniques.
From the data analysis, we conclude that the random walk hypothesis for Nifty and Sensex is rejected during the whole four year period of study.
Other applications are in the field of finance, where attempts have been made to predict stock returns, prices as well as to test the random walk hypothesis and other aspects of the efficient market hypothesis under a different set of assumptions than are traditionally needed.
In the first scenario, the true model is assumed to be the one consistent with the random walk hypothesis, i.
Pant and Bishnoi (2002) tested the random walk hypothesis using few indices from NSE and BSE in India for the period starting April 1996 to June 2001.
time series, this study investigates the random walk hypothesis in nine major foreign stock market indices.
A fording indicative of a Markov chain provides evidence against the random walk hypothesis and suggests that Turkish IPO performance may be predictable.