Random Walks in Stock Market Prices
FOR MANY YEARS economists, statisticians, and teach-
ers of finance have been interested in developing and testing models of stock price behavior. One important model that has evolved from this research is the theory of random walks. This theory casts serious doubt on many other methods for describing and predicting stock price behavior methods that have considerable popularity outside the academic world. For example, we shall see later that if the random walk theory is an accurate description of reality, then the various "technical" or "chartist" procedures for pre- dicting stock prices are completely without value. -

In general the theory of random walks raises chal- lenging questions for anyone who has more than a passing interest in understanding the behavior of stock prices. Unfortunately, however, most discussions of the theory have appeared in technical academic journals and in a form which the non-mathematician would usually find incomprehensible. This article describes, briefly and simply, the theory of random walks and some of the important issues it raises concerning the work of market analysts. To preserve brevity some aspects of the theory and its implications are omitted. More complete (and also more technical) discussions of the theory of random walks are available elsewhere; hopefully the introduction provided here will encourage the reader to examine one of the more rigorous and lengthy works listed at the end of this article. Common Techniques for Predicting Stock Market Prices

In order to put the theory of random walks into perspective we first discuss, in brief and general terms, the two approaches to predicting stock prices that are commonly espoused by market professionals. These are ( 1 ) "chartist" or "technical" theories and (2) the theory of fundamental or intrinsic value analysis. The basic assumption of all the chartist or technical theories is that history tends to repeat itself,...

...“StockMarketPrices follow the RandomWalks”
An evidence of Efficiency of the Karachi Stock Exchange (KSE)
Salman Hashmat
MBA-II
Superior University Lahore
E-mail: salmanhushmat@yahoo.com
Waqas Hameed
MBA-II
Superior University Lahore
Adeel Arshad
M.Phil (Finance Scholar)
Superior University Lahore
E-mail: adi_00782@yahoo.com
Shahid Nasim
M.Phil (Finance Scholar)
Superior University Lahore
E-mail: shahid.nasim208@gmail.com
Abstract
This study intends to describe the behavior of the Karachi Stock Exchange (KSE)-100 Index regarding the movement of share prices of the companies listed at KSE-100 Index and also studies that share at KSE follow RandomWalk and share prices can be predicted or not because almost every investor want to gain abnormal return and outperform the market. To investigate this behavior of the KSE simple unit root tests and cointegration test is used which suggests about the efficiency of the market.
Keywords: KSE, Market Efficiency, EMH, RandomWalk, Unit Root and Cointegration
Introduction
The Karachi Stock Exchange was established on September 18, 1947. KSE is the first share market of the Pakistan where almost 70-80% of the trading is taking place now days. The KSE gained...

...EFFICIENT MARKETTHEORY AND TESTS
Introduction
Market Efficiency
A market is said to be efficient if prices in that market reflect all available information. Market efficiency refers to a condition in which current stockprices reflect all the publicly available information about a security.
Efficient market emerges when new information is quickly incorporated into the share price so that the price becomes information. In other words the current marketprice reflects all available information. Under these conditions the current marketprice in any financial market could be the best (unbiased estimate) of the value of the investment.
The Theory of Efficient Market Hypothesis
The Efficient Market Hypothesis (EMH) was first defined by Eugene Fama in his financial literature in 1965.He defined the term "efficient market" as one in which security prices fully reflects all available information.
EMH is the theory describing the behavior of an assumed “perfect” market which states that:
Securities are fairly priced and that their expected returns equal their required return.
Security prices, at any one point, fully reflect...

..."A RandomWalk Down Wall Street"
There is a sense of complexity today that has led many to believe the individual investor has little chance of competing with professional brokers and investment firms. However, Malkiel states this is a major misconception as he explains in his book "A RandomWalk Down Wall Street". What does a randomwalk mean? The randomwalk means in terms of the stockmarket that, "short term changes in stockprices cannot be predicted". So how does a rational investor determine which stocks to purchase to maximize returns? Chapter 1 begins by defining and determining the difference in investing and speculating. Investing defined by Malkiel is the method of "purchasing assets to gain profit in the form of reasonably predictable income or appreciation over the long term". Speculating in a sense is predicting, but without sufficient data to support any kind of conclusion. What is investing? Investing in its simplest form is the expectation to receive greater value in the future than you have today by saving income rather than spending. For example a savings account will earn a particular interest rate as will a corporate bond. Investment returns therefore depend on the allocation of funds and future events. Traditionally there have been two approaches used by...

...Dr. S. Zong
18th November 2014
A RandomWalk Down Wall Street
By Burton G. Malkiel
Introduction
A RandomWalk refers to the term that future steps or directions cannot be predicted by past history. In the investment world this means that how a stock performs in the immediate future cannot be predicted from its past performances. Academics point out that any randomly selected group of securities would perform just as well or better than carefully analyzed portfolio created by fund managers based on its performance history. Currently in its 10th edition A RandomWalk Down Wall Street by Burton G. Malkiel is a time tested strategy for successful investing for people of all walks; from the novice entrepreneur to the seasoned investor. It gives a clear understanding of how the stockmarket works and makes a compelling argument for passive investing with a long term goal.
Efficient Markets
In his preface Burton G. Malkiel states that the original message behind A RandomWalk Down Wall Street is that “investors would be better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed funds”, and that the stockmarket is pretty efficient and most everyone is wasting their time trying to find inefficiencies to exploit....

...
Examining market efficiency in India: an empirical analysis of the RandomWalk Hypothesis
Alan Harper South University
Zhenhu Jin Valparasio University
ABSTRACT
This study tries to determine whether the Indian stockmarket is efficient by examining if the stock returns follow a randomwalk. Following previous studies, we use autocorrelation, the Box-Ljung test statistics and the run test and find that the Indian stockmarket was not efficient in the weak form during the testing period. The results suggest that the stockprices in India do not reflect all the information in the past stockprices and abnormal returns can be achieved by investors exploiting the market inefficiency.
Keywords: Autocorrelation tests, runs test, randomwalk hypothesis, stock index, India
INTRODUCTION
If a market is efficient, stockprice movements should follow a randomwalk and the price movements in the past should be not related to future price movements. But if the market is not efficient and price movements are not random, some investors can exploit the inefficiency by gaining...

...essential of a randomwalk is the changes of stocks are irregular following Brownian movement; the path of price changes is unpredictable. Mentioning prediction of the future, an autoregressive time-series is a significant and effective model. For a randomwalk without drift, however, standard regression analysis on the time-series is unavailable, because it’s against the assumption of time series model, covariance stationary. Because the variance of the time series is lack of upper bound, which violates the principle that the variance of a covariance stationary series must be a constant. Meanwhile a randomwalk doesn’t have a finite mean-reverting level. So we cannot use the AR model to predict the future for a randomwalk. Because based on AR(1) model, for a randomwalk without drift, the best prediction of future value is current value and this result doesn’t have any economic meaning. So it can be concluded that for a randomwalk, the changes of future should be unpredictable. As the change of stockprices follows a randomwalk, the change of stockprice is undoubtedly unpredictable.
Considering from another perspective, if the stockprices follow a...

...action/reaction on markets as a result/cause of more complex, mutually dependent events. Studies of these relations began with the simplest ‘randomwalk’ hypothesis stating that price reactions are unforecastable. It was supported by ‘martingale’ stochastic process. Theoretically it is not possible to fully exist, as there would be no place for speculation and participants would become more like gamblers than stock traders. However it laid foundations to further studies. Use of more sophisticated technology enabled to determine non-random movements and anomalies in asset prices. Suspicious fluctuations, after investigation, brought up conclusions that were not based on probability but mainly on informational influence. The extreme hypothesis represented an abstract situation, where all information were reliable and truly reflect value of securities. Overvalued or undervalued assets would not exist.
Efficient Market Hypothesis was affecting economical environment for last four decades. Financial practice along with further academic examinations have strongly relied on it outcomes (Roll, 1997). Despite inconsistencies, like behavioural forces, it was not rejected. Some financers has started a debate about deceptive influence of EMH on traders. They are claiming that lack of risk amendments in the theory caused participants to have "chronic...

...Part 1
According to the model of efficient market, the stockprices should be taken as the best forecast to calculate the discounted future dividend provided with an available information set. The efficient marketstheory (EMT) explains that all relevant information about the intrinsic value of an asset is reflected in the price of that asset (Dimson and Mussavian 2000). Hence, this theory assumes that the financial markets tend to be efficient in information.
Market efficiency is further classified into three forms by Fama (1970) namely; weak form market efficiency, semi-strong form and strong form market efficiency. A market is efficient in weak form if the predictions regarding stockprice changes could not be made based on information about past returns or any other market based indictor e.g. ratio of puts to calls and the trading volume. A market will be considered weak form efficient when the information about historical prices is reflected in the current prices. This implies that the stockprices will be serially correlated and thus the investors cannot develop a trading rule which is based on past price patterns in the hope of earning an abnormal return.
The semi strong...