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Random Walk Theory

Random walk theory posits that stock price movements are random rather than orderly, changing immediately based on new economic, industry, or company information. According to this theory, each price change is independent and reflects all currently available information, meaning the past cannot predict the future and prices adjust efficiently to new information. The random walk theory later became known as the efficient market hypothesis.

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Rohit Sonvaniya
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527 views3 pages

Random Walk Theory

Random walk theory posits that stock price movements are random rather than orderly, changing immediately based on new economic, industry, or company information. According to this theory, each price change is independent and reflects all currently available information, meaning the past cannot predict the future and prices adjust efficiently to new information. The random walk theory later became known as the efficient market hypothesis.

Uploaded by

Rohit Sonvaniya
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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RANDOM WALK THEORY

The basic assumption in technical analysis is that stock price movement is quite orderly and not random The new theory came to be known as Random walk theory because of its principal contention that share price movements represent a random walk rather than an orderly movement. A change occurs in the price of a stock only because of certain changes in the economy, industry or company These changes alters stock prices immediately and the stock moves to a new level, either upwards or downwards, depending on the type of information

Further change in the price of the stock will occur only as a result of some other new piece of information, which was not available earlier.

According to this theory, changes in stock prices show independent behavior and are dependent on the new pieces of information that are received.
Each price change is independent of other price changes , because each change is caused by a new piece of information. The current stock price fully reflects all information on the stock . The price of a security two days ago can in no way help in speculating the price two days later

The price of each day is independent . It may be unchanged, higher or lower from the previous price, but that depends on new pieces of information being received each day. The random walk theory presupposes that the stock markets are soefficient and competitive that there is immediate price adjustment . This is the result of good communication system through which information can be spread almost anywhere in the country instantaneously. The RWT is based on the hypothesis that the stock markets are efficient . Hence this theory later came to be known as the Efficient Market Hypothesis or The efficient market model or EMH.

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