Random Walk Theory of Share Price Movements - Essay Example

Extract of sample
Random Walk Theory of Share Price Movements

A lot many efforts were made towards identifying a predictable trading pattern which could be used for chasing profitable deals. From the mid-1950s to the early 1980s, a random walk theory (RWT) of share prices was developed based on the past empirical evidence of randomness in share price movements. RWT basically stated that speculative price changes were independent and identically distributed, so that the past price data had no predictive power for future share price movements. RWT also stated that the distribution of price changes from transaction to transaction had finite variance. In addition, if transactions were fairly uniformly spread across time and were large in numbers, then the Central Limit Theorem suggested that the price changes would be normally distributed. Kendall (1953) calculated the first differences of twenty-two different speculative price series at weekly intervals from 486 to 2,387 terms. He concluded that the random changes from one term to the next were large and obfuscated any systematic effect which may be present. ...Show more

Summary

A graph of the daily price of a share looks similar to that which would be obtained by plotting a series of cumulative random numbers. This shows clearly that share prices move randomly at the whim of investors, indicating that the market is not price efficient." Contrary to the proposition being made above it has been stated in the finance literature that random walk like movement of the share prices does indicate that the market is price efficient-though differently under to varying degrees of strength of hypotheses…
Author : electa64
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Random Walk Theory of Share Price Movements"
with a personal 20% discount.
Grab the best paper

Related Essays

Weak Form Market Efficiency.
Information that is contained in the stock market data is considered by a few to be able to guide investors and analysts about the future course the stock markets might take in terms of predicting equity prices and returns. A lot of technical analysis is based upon this belief.
17 pages (4250 words) Essay
Price Theory
At the end of the paper the reader will be clearly able to understand the concept of price theory. Prices theory is one of the most important parts of Economics. Generally the price of a commodity or service is decided by taking into consideration the production cost incurred on the production of the commodity or the service.
4 pages (1000 words) Essay
The effect of dividends on stock price
Quite often, in fact usually, they end up making more money than most speculators and gamblers. Skilful investment decisions alone cannot make you an instant millionaire or enormously rich overnight. For that you need to be a speculator or a gambler with an inborn flair and instinctive feel for the market, combined with a willingness to take great risks.
37 pages (9250 words) Coursework
Price.
Price is an important concept to microeconomics and it is one of the important variables that are considered in the allocation of resources for the operation of the business. When price is considered in terms of the allocation of resources then it is referred to in terms of the price theory.
9 pages (2250 words) Essay
Share Buybacks
'As investing jargon goes a share buyback is one of the simplest terms. It's a company buying back its own shares. It can do this in one of two ways. The first, and by far the most common, is when a company buys shares on the open market, just as a private investor does when they buy shares through a broker.
7 pages (1750 words) Essay
Finance market
A lot many efforts were made towards identifying a predictable trading pattern which could be used for chasing profitable deals. From the mid-1950s to the early 1980s, a random walk theory (RWT) of share prices was developed based on the past empirical evidence of randomness in share price movements.
10 pages (2500 words) Essay
Find out how much would it cost
to get a custom paper written by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT