THE THEORY OF RANDOM WALK AND STOCK PRICE BEHAVIOR OF NEPALESE COMMERCIAL BANKK
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School of Management (SOMTU)
Abstract
Bachelier (1900) first developed the idea of efficient market and uses the random walk
model for stock prices behavior. He developed a theory that speculative prices follow
random walks on the assumption of zero expectation of gain. After Bachelier (1900),
further investigation on security prices behavior advanced but slowly. The concept of
security prices following a random walk is connected to that of the Efficient Market
Hypothesis (EMH). The efficient market hypothesis (EMH) had its genesis in the
random walk theory of the movement of security prices that appeared in literature in
the late 1950s. The concept of efficient market hypothesis was developed by financial
economist Eugene Fama in early 1960s. The basic idea of emh was it is impossible to
"beat the market “or “outperform” in the market. According to the Efficient Market
theory, a stock's price will reflect all available information in an active market with a
large number of well-informed investors. Fama (1970) surveyed the idea of an
informational efficient capital market and explain that “A market in which prices
always “fully reflects” available information is called “efficient”. Stock market is said
to be efficient if the stock return series follow random-walk behavior where historical
sequence of returns are irrelevant in predicting future stock prices leading a market to
be efficient in weak-form. Because of the widespread availability of public information,
any information that may be utilized to forecast stock performance is already
represented in the stock price today. As a result, in an efficient market, it is impossible
for an investor to consistently outperform the market and achieve abnormal profits.