Random Walk Hypothesis

Abstract

This chapter covers history, definition, assumptions, and implications of the Random walk hypothesis. The basic idea is that stock prices take a random and unpredictable path. Discussion includes why the random walk hypothesis is still relevant in finance in spite of several criticisms? Detailed discussion made on random walk hypothesis and market efficiency. Fama’s joint hypothesis problem and its implication is covered in detail. In addition to it martingales and its features are conversed in detail. Illustrations are shown for different random walk models using R-Programming namely Random Walk with Fixed Moves and Random Walk with Random Moves. Critical issues related to the various Random Walk models in practice are discussed in detail. At the end testing of the various Random Walk models and Martingales using EViews are demonstrated.