Description
it also explains the coin toss game and the inferences from these theories for the investors.
Random Walk and search for a Theory
In search of the theory to demystify operating of stock markets.
• In 1953 Maurice Kendall first proposed the Random Walk. • The term was popularized by the 1973 book, A Random Walk Down Wall Street, by Burton Malkiel, currently a Professor of Economics and Finance at Princeton University. • Its hard to believe but the best way to predict market is to flip a coin!
What is a Random Walk?
• Stocks follow a random walk if the movement of stock prices from day to day DOES NOT reflect any pattern. • Statistically speaking, the movement of stock prices is random, albeit with a positive skewness (technically known as a submartingale)
Slide 10–3
Random Walk Theory
Coin Toss Game
Heads
Heads
$106.09
$103.00
Tails
$100.43
$100.00
Heads
$100.43
Tails
$97.50
Tails
$95.06
Slide 10–4
The Coin Toss Game
• You start with Rs.100 • At the end of each week, a coin is tossed • If the coin comes up heads, you win 3% of your investment • If the coin comes up tails, you lose 2.5% • The process is a random walk with a positive drift of 0.25% per week (the drift is equal to the expected outcome – (0.5)(3%) + (0.5)(-2.5%) = 0.25% • It is a random walk because the change in price next week is independent of the change in price this week
Slide 10–5
Random Walk Theory
Slide 10–6
Why Does a Random Walk Theory Make Sense for Stock Prices
• If we assume that stock prices are based on information . . . • Then stock prices should change on the receipt of new information • Since by definition new information arrives in a random & unpredictable fashion, stock prices should change in a random & unpredictable fashion
Slide 10–7
So what can we conclude?
•Are all investors fools?
Other alternative theory.
• Technical analysis • The non-random walk equation
where • Xt is the price of the stock at time t • ? is an arbitrary drift parameter • ?t is a random disturbance term
What's in it for us?
• By using it a investor can gain by investing in stocks who have better fundamentals. • Upward earnings revision consistently during last 6 months. • Revised price targets. • Investors like Warren Buffett are the best “Non Random Walkers”
THANK YOU
doc_770835872.ppt
it also explains the coin toss game and the inferences from these theories for the investors.
Random Walk and search for a Theory
In search of the theory to demystify operating of stock markets.
• In 1953 Maurice Kendall first proposed the Random Walk. • The term was popularized by the 1973 book, A Random Walk Down Wall Street, by Burton Malkiel, currently a Professor of Economics and Finance at Princeton University. • Its hard to believe but the best way to predict market is to flip a coin!
What is a Random Walk?
• Stocks follow a random walk if the movement of stock prices from day to day DOES NOT reflect any pattern. • Statistically speaking, the movement of stock prices is random, albeit with a positive skewness (technically known as a submartingale)
Slide 10–3
Random Walk Theory
Coin Toss Game
Heads
Heads
$106.09
$103.00
Tails
$100.43
$100.00
Heads
$100.43
Tails
$97.50
Tails
$95.06
Slide 10–4
The Coin Toss Game
• You start with Rs.100 • At the end of each week, a coin is tossed • If the coin comes up heads, you win 3% of your investment • If the coin comes up tails, you lose 2.5% • The process is a random walk with a positive drift of 0.25% per week (the drift is equal to the expected outcome – (0.5)(3%) + (0.5)(-2.5%) = 0.25% • It is a random walk because the change in price next week is independent of the change in price this week
Slide 10–5
Random Walk Theory
Slide 10–6
Why Does a Random Walk Theory Make Sense for Stock Prices
• If we assume that stock prices are based on information . . . • Then stock prices should change on the receipt of new information • Since by definition new information arrives in a random & unpredictable fashion, stock prices should change in a random & unpredictable fashion
Slide 10–7
So what can we conclude?
•Are all investors fools?
Other alternative theory.
• Technical analysis • The non-random walk equation
where • Xt is the price of the stock at time t • ? is an arbitrary drift parameter • ?t is a random disturbance term
What's in it for us?
• By using it a investor can gain by investing in stocks who have better fundamentals. • Upward earnings revision consistently during last 6 months. • Revised price targets. • Investors like Warren Buffett are the best “Non Random Walkers”
THANK YOU
doc_770835872.ppt