Advanced Investment and Theory Essay Example | Topics and Well Written Essays - 2000 words - 1

Advanced Investment and Theory - Essay Example He identified that past, present and discounted future events can be found from market price but they show no significant relation with respect to price changes. According to him if the market cannot predict its fluctuations then it does assess them as being more or less likely and this likelihood can be found out mathematically. During the first half of the twentieth century there have been many emerging theories on speculative markets. But earlier literature did not sit easily with beliefs of practitioners. According to Bachelier the commodity prices vary randomly. Later Jones, Cowles (1937) and Working (1934) showed that the US stock prices also shared similar characteristics. But these studies did not surfaced out until the late 1950s. Many studies were done regarding the difficulty in beating the equity market. Cowles (1933) concluded that there was no evidence of any ability to outperform the market. He later provided evidence on large number of sample stock for longer time per iod and came out with similar results. Kendall (1953) performed an experiment on 22 UK stock and commodity price series. He found that in a series of prices that were studied at fairly close intervals the random changes from one price to another was so large that it ruled out any systematic effect. Basically the data behaved like a wandering series. This observation was inconsistent with the views of economist and it came to be known as random walk theory or random walk model. This led to a major challenge for the market analyst who tried to predict future path of security prices. Osborne (1959) studied US stock prices and found that common stock prices have characteristics similar to movement of molecules. Despite such evidence of randomness there were few instances of anomalous behaviour, certain price series appeared to follow predictable paths. This comprised of a