Random Walk Hypothesis

The Random Walk Hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus cannot be predicted. It is consistent with the efficient-market hypothesis.

The concept can be traced back to the work of French mathematician Louis Bachelier and holds that the past movement or trend of a stock price or market cannot be used to predict its future movement. In other words, price changes are random and not influenced by past price changes. The theory has been particularly influential in finance since the 1970s.

The hypothesis argues that the fundamental factors, like future earnings or dividend payouts, that reflect in stock prices change randomly and cause price changes to occur randomly. As such, mathematical models and charts aiming to predict future price movements are considered to be of little or no value. This theory takes the viewpoint that it is just as likely for a stock price to rise as it is for it to fall.

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