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Stock Market Prices Do Not Follow Random Walks

turingfinance.com

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Re: Stock Market Prices Do Not Follow Random Walks

#11

Post by FlorianOver »

nickff wrote: post #2

This post is quite interesting, and I will have to re-read and ponder it some more, but there is one obvious flaw in the analysis. By analyzing the past returns of current S&P500 companies, the author is allowing for survivorship bias; companies which have done consistently well (in terms of market capitalization) over the analysis period are likely to be over-represented in current indices. To correct for this, the…

> By analyzing the past returns of current S&P500 companies, the author is allowing for survivorship bias;

Thought so myself. Interesting to see what the result were with data from the beginning of the period.

Re: Stock Market Prices Do Not Follow Random Walks

#13

Post by phreeza »

It is quite a leap to go from 'not gaussian' to 'not random' as done here. All that has been falsified, as far as I can tell, is a very simple model of a random walk with normally distributed disturbances.

It would be interesting how much better it becomes if higher moments, in particular kurtosis ('fat tails') are included.

Re: Stock Market Prices Do Not Follow Random Walks

#14

Post by [deleted] »

phreeza wrote: post #13

It is quite a leap to go from 'not gaussian' to 'not random' as done here. All that has been falsified, as far as I can tell, is a very simple model of a random walk with normally distributed disturbances. It would be interesting how much better it becomes if higher moments, in particular kurtosis ('fat tails') are included.

[deleted]

Re: Stock Market Prices Do Not Follow Random Walks

#15

Post by csours »

[deleted] wrote: post #14
phreeza wrote: post #13

It is quite a leap to go from 'not gaussian' to 'not random' as done here. All that has been falsified, as far as I can tell, is a very simple model of a random walk with normally distributed disturbances. It would be interesting how much better it becomes if higher moments, in particular kurtosis ('fat tails') are included.

[deleted]

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Re: Stock Market Prices Do Not Follow Random Walks

#17

Post by QuantMash »

phreeza wrote: post #13

It is quite a leap to go from 'not gaussian' to 'not random' as done here. All that has been falsified, as far as I can tell, is a very simple model of a random walk with normally distributed disturbances. It would be interesting how much better it becomes if higher moments, in particular kurtosis ('fat tails') are included.

The article clearly states that the test extends to many forms of randomness beyond Gaussian:

"Nevertheless, the desired effect of stochastic volatility namely, fatter tailed distributions ..."

"... we want a test for the random walk hypothesis which passes (it concludes the market is random) even if the returns demonstrate heteroskedastic increments and large drifts. Why? Because both of these properties are widely observed in most historical asset price data (just ask Nassim Taleb) and neither invalidate the fundamental principle underpinning the random walk hypothesis, namely the Markov property (unforecastibility of future asset prices given past asset prices)"

Re: Stock Market Prices Do Not Follow Random Walks

#18

Post by phreeza »

QuantMash wrote: post #17
phreeza wrote: post #13

It is quite a leap to go from 'not gaussian' to 'not random' as done here. All that has been falsified, as far as I can tell, is a very simple model of a random walk with normally distributed disturbances. It would be interesting how much better it becomes if higher moments, in particular kurtosis ('fat tails') are included.

The article clearly states that the test extends to many forms of randomness beyond Gaussian: "Nevertheless, the desired effect of stochastic volatility namely, fatter tailed distributions ..." "... we want a test for the random walk hypothesis which passes (it concludes the market is random) even if the returns demonstrate heteroskedastic increments and large drifts. Why? Because both of these properties are widely…

Sorry, I missed that. Should have read it more closely! I got suckered by the mu, sigma and z-score terminology I suppose.
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