Random Walk

A Random Walk Down Wall Street

• A random walk is one in which future steps or directions cannot be predicted on the basis of past actions. When the term is applied to the stock market, it means that short-run changes in stock prices cannot be predicted. This idea of a random walk is used in the Efficient Market Hypothesis.

• Efficient Market Hypothese- A theory of asset price determination that holds that asset prices embody all publicly available information. The theory implies that stock prices should be unpredictable, or follow a random walk, since changes should occur only in response to new information about fundamentals.