Random walk theory

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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.
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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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Therefore, the random walk hypothesis is tested using the Lo and MacKinlay (1988) variance ratio (VR) test.
Mishra & Mishra (2011) test the random walk hypothesis in the presence of nonlinearities for two market indices belonging to the National Stock Exchange (NSE) and ten individual stocks.
The efficiency of the Russian stock market: A revisit of the random walk hypothesis. Academy of Accounting and Finance Studies Journal, 19(1), 42-48.
The most natural way of expressing the random walk hypothesis is the one in which the price of financial assets is represented by a stochastic process, following an internal dependency of the manner:
(2011) examined the Pakistan stock markets and concluded that the random walk hypothesis showed no compliance.
Share price behaviour in India: A spectral analysis of random walk hypothesis. Sankhya, The Indian Journal of Statistics.
They found that significant positive serial correlation for weekly and monthly holding-period returns and therefore, the study revealed that the rejection of random walk hypothesis for the sample period.
If we agree with second hypothesis, [H.sub.0]: [alpha] = [gamma] = [beta] = 0, this is the confirmation of the random walk hypothesis. But this time we are rejecting that the series [y.sub.t] has a trend parameter [beta] and drift parameter [alpha].
Louis Bachelier stated in 1900, "The mathematical expectation of the speculator is zero." (1) Bachelier's idea was termed the Random Walk Hypothesis (RWH) from an earlier discussion among scholars.
The random walk hypothesis developed in Hall (1978) has not done well in empirical tests.
The runs test tabulates and compares the number of runs in the sample against its sampling distribution under the random walk hypothesis. Suppose that each observation is independently and identically distributed.
Based upon the random walk hypothesis, early studies presumed that stock prices fluctuated randomly.