random walk

The random walk hypothesis may be derived from the weak-form efficient markets hypothesis, which is based on the assumption that market participants take full account of any information contained in past price movements (but not necessarily other public information). In his book A Random Walk Down Wall Street, Princeton economist Burton Malkiel said that technical forecasting tools such as pattern analysis must ultimately be self-defeating: “The problem is that once such a regularity is known to market participants, people will act in such a way that prevents it from happening in the future.”[45] In the late 1980s, professors Andrew Lo and Craig McKinlay published a paper which casts doubt on the random walk hypothesis. In a 1999 response to Malkiel, Lo and McKinlay collected empirical papers that questioned the hypothesis’ applicability[46] that suggested a non-random and possibly predictive component to stock price movement, though they were careful to point out that rejecting random walk does not necessarily invalidate EMH, an entirely separate concept from RWH. Technicians say that the EMH and random walk theories both ignore the realities of markets, in that participants are not completely rational and that current price moves are not independent of previous moves.


You are tasked to critically discuss ‘The challenges in forecasting the exchange rate in the short run and the long run.’run.’