7.07.2005

Q&A: What does it mean for the price of...

... an instrument to follow a random walk?

Successive price changes are independent of each other (ie. no correlation)

Bonus Points

  • New information about securities comes to the market in a random fashion, and the timing of the announcement is generally independent of others.
  • Due to competition, security prices adjust rapidly to the arrival of new information, and the current prices reflect all avaiable information, thus making the capital market efficient.
  • The price adjustment is unbiased: sometimes the market will overadjust and/or underadjust, but you cannot predict its behavior.
  • The expected returns should match its perceived risk.

Category: C++ Quant > Financial Markets

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