Non-Random Walk Theory: Difference between revisions

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===Criticisms===
===Criticisms===


:*'''Short Term Momentum, Including Underreaction to New Information'''
======:*'''Short Term Momentum, Including Underreaction to New Information'''======
:::Lo and MacKinley point to the presence of some "momentum" in short-run stock prices.  Momentum is a series of repeated price changes in the same direction.  Lo and MacKinley also point to the under reaction to new information.  This means that the stock is undervalued and that you can profit off of new information.
:::Lo and MacKinley point to the presence of some "momentum" in short-run stock prices.  Momentum is a series of repeated price changes in the same direction.  Lo and MacKinley also point to the under reaction to new information.  This means that the stock is undervalued and that you can profit off of new information.


::'''Malkiel's Response'''
::'''Malkiel's Response'''
:::The statistical dependencies giving rise to momentum are extremely small and unlikely to provide the opportunity to achieve excess gains.
:::The statistical dependencies giving rise to momentum are extremely small and unlikely to provide the opportunity to achieve excess gains. Momentum strategies (buying stocks that show positive serial correlation) produced positive relative returns in the 1990s but negative relative returns during 2000.  The most predictive patters seem to disappear as quickly as they are published. 
 
 
:*'''Long Run Return Reversals'''
:::Fama and French found that up to 40% of variation in long holding periods can be predicted with a negative correlation with past returns.  This supports the '''contrarian theory.'''




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[[Random Walk]]  |  [[Efficient-Market Hypothesis]]  |  [[Fundamental Analysis]]  |  [[Technical Analysis]]  |  [[Non-Random Walk Theory]]
[[Random Walk]]  |  [[Efficient-Market Hypothesis]]  |  [[Fundamental Analysis]]  |  [[Technical Analysis]]  |  [[Non-Random Walk Theory]]

Revision as of 22:17, 30 April 2007

  • Economists Andrew W. Lo and A. Craig MacKinlay criticized Malkiel's Random Walk theory in their book, A Non-Random Walk Down Wall Street

Criticisms

:*Short Term Momentum, Including Underreaction to New Information
Lo and MacKinley point to the presence of some "momentum" in short-run stock prices. Momentum is a series of repeated price changes in the same direction. Lo and MacKinley also point to the under reaction to new information. This means that the stock is undervalued and that you can profit off of new information.
Malkiel's Response
The statistical dependencies giving rise to momentum are extremely small and unlikely to provide the opportunity to achieve excess gains. Momentum strategies (buying stocks that show positive serial correlation) produced positive relative returns in the 1990s but negative relative returns during 2000. The most predictive patters seem to disappear as quickly as they are published.


  • Long Run Return Reversals
Fama and French found that up to 40% of variation in long holding periods can be predicted with a negative correlation with past returns. This supports the contrarian theory.



Random Walk | Efficient-Market Hypothesis | Fundamental Analysis | Technical Analysis | Non-Random Walk Theory