Efficient Market Hypothesis

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT| EFFICIENT MARKET HYPOTHESIS | | MRIGANKA DAS, 13/09 | INTRODUCTION: The Efficient Market Hypothesis and Random Walks unity of the early applications of computers in economics in the 1950s was to learn economic time series. Business cycle theorists believed tracing the phylogenesis of several economic variables over time would clarify and guess the progress of the economy through boom and bust periods. A natural candidate for analysis was the behavior of the post market prices over time. Assuming stock prices reflect the prospects of the firm, recurring patters of peaks and troughs in economic performance ought to show up in those prices. In 1953 Maurice Kendall, a British statistician, presented a controversial paper to the regal Statistical Society on the behavior of stock and good prices.1 Kendall had expected to find regular price cycles, but to his move they did not seem to exist. Each series appeargond to be a wandering one, almost as if once a week the Demon of Chance drew a random outcome… and added it to the current price to determine the next weeks price. In other words, the prices of stocks and commodities seemed to follow a random walk.

When Maurice Kendall suggested that stock prices follow a random walk, he was implying that the price changes are independent of one another just as the gains and losses in the coin-tossing games are independent. The figure below illustrates this. Each point shows the change in the price of Microsoft stock on resultant days. The circled dot in the southeast quadrant refers to a checkmate of days in which a 1 percent summation was followed by a 1 percent decrease. If in that location was a systematic tendency for increased to be followed by decreases, at that place would be many dots in the southeast quadrant and hardly a(prenominal) in the northeast quadrant. It is obvious from a glance that there is very little pattern in these price movements. In fact,... If you want to get a full essay, order it on our website: Ordercustompaper.com

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