23-02-2013, 09:31 AM
Random Walk Model
Random.ppt (Size: 534 KB / Downloads: 68)
One of the simplest models, yet the random walk model is widely used in the area of finance. A common and serious departure from random behavior is called a random walk.
By definition, a series is said to follow a random walk if the first differences are random.
In a random walk model, the series itself is not random.
However, its differences—the changes from one period to the next—are random.
This type of behavior is typical of stock price data.
Why Transform a Series?
Forecast future trends to aid in decision making
If series follows random walk, original series offers little or no insights
May need to analyze first differenced series
Intel Closing Prices [Original Series]
The (second) test counts the number of times the sequence rose or fell. The number of such runs equals 76, as compared to an expected value of 104.333 if the sequence were random.
Since the p-value for this test is less than 0.05, we can reject H0: The series is random at the 95% confidence level.
Intel Closing Prices
Thus, for Intel Closing Prices [6/16/97-6/12/00]
The series (Intel Closing Prices) is not random.
However, its differences—the changes from one period to the next—are random.
Intel Closing Prices behavior typical of stock price data…that is, the series is a random walk model.