Over the years there have been many research projects which aimed to find out if market action was random or whether there was proof that it could be predicted on a regular basis. If you are trading the stockmarket, there would be no point in playing the game if it was purely random, and various important papers have shown a distinct repetition of patterns both in price and time cycles, which effectively confirm that market action is not random.
Charts often exhibit similar pattern behaviour in indices, forex, treasury bonds and commodities, as well as share prices. Nevertheless, there are times when action does appear haphazard, and one explanation for this is what is called the ‘random walk theory’.
Random walks and efficient markets
There have been three main works of note which attempted to ‘explain’ random action. giocare In borsa In 1973 Burton Malkiel wrote “A Random Walk Down Wall Street”, which has become one of the most widely known investment works. The book expounded on his stock market theory in which he stated that the past movement or direction of the price of a stock or overall market could not be used to predict its future movement.
This was an extension of work carried out twenty years before, when Maurice Kendall put forward a theory that stock price fluctuations are independent of each other and have the same probability distribution, but that over a period of time, prices maintained an upward trend.
It all comes down to how ‘efficient’ the market is viewed to be, and “The Efficient Market Hypothesis” evolved in the 1960s from a Ph.D. dissertation by Eugene Fama. EMH stated that at any given time, security prices fully reflected all available information, which is a fairly radical statement.
His view was that in an active market that included many well informed and intelligent investors, securities would be appropriately priced. They would reflect all available information, and if the market was efficient, no information or analysis could be expected to result in outperformance of an appropriate benchmark. In the market, there were large numbers of competing players, with each trying to predict future market values of individual securities, and where important current information was almost freely available to all participants.