Random Walks in Stock Prices by Eugene Fama (1965)
Origional Eugene Fama paper on Random Walk.
FOR MANY YEARS economists, statisticians,
and teachers of finance have been interested
in developing and testing models of
stock price behavior. One important model
that has evolved from this research is the
theory of random walks. This theory casts
serious doubt on many other methods for
describing and predicting stock price behavior-
methods that have considerable
popularity outside the academic world. For
example, we shall see later that, if the random-
walk theory is an accurate description
of reality, then the various “technical” or
“chartist” procedures for predicting stock
prices are completely without value.
In general, the theory of random walks
raises challenging questions for anyone who
has more than a passing interest in understanding
the behavior of stock prices. Unfortunately,
however, most discussions of
the theory have appeared in technical academic
journals and in a form which the
non-mathematician would usually find incomprehensible.
This paper describes, briefly
and simply, the theory of random walks
and some of the important issues it raises
concerning the work of market analysts. To
preserve brevity, some aspects of the theory
and its implications are omitted. More complete
(but also more technical) discussions
of the theory of random walks are available
elsewhere; hopefully, the introduction provided
here will encourage the reader to examine
one of the more rigorous and lengthy
works listed at the end of the paper.
www.chicagobooth.edu/faculty/selectedpapers/sp16.pdf
