THE THEORY OF RANDOM WALK AND STOCK PRICE BEHAVIOR OF NEPALESE COMMERCIAL BANKK

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.