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Random Walk Theory- Investment

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Random Walk Theory- Investment

  1. 1. Know about RWT Also called asWeak Form of Efficiency. Pricesare based on theinflow of news which randomly occur in themarket. Futurepricescannot bepredicted. Buying and selling information lead the trader align with theintrinsic value.
  2. 2. Simulation Test Serial Correlation Test Run Test Filter Test
  3. 3. Simulation Test Performed by Harry Roberts. Examinetheappearanceof Dow Jones index expressed in levelsand weekly changes Changesaregenerated from random numbers& then converted to graphs depicting levelsof theDow Jonesindex.
  4. 4. Simulation Test
  5. 5. Serial Correlation • Examine by Moore in 1964. • Correlate the price change in one week to price change in another week. • Price changes are correlated, points plotted in graph tend to lie in the straight line. • He considered avg correlation to be 0.06%, if low low tendency.
  6. 6. Filter Test Stock movesup with percent  Buy it and it for along period. When thesamepercent falls Sell it. It Rangesfrom 0.5% to 50%. For eg:- Assumefilter to be10%. Priceis Rs20, Buy at Rs22 & reached till Rs30 & fall, Sell at Rs. 27.
  7. 7. Run Test It is a set of consecutive prices of the same sign. If increase “+” & decrease “-”. Shares Number of Runs A B C + + + + + +………2 +-+-+-+-+ -…..10 - -+- + + +- - -….6

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