Random Walks and Market Efficiency

Random Walks and Market Efficiency

A financial value is a random walk if its next change in value is not related to, predicted better with or explained by, any previous changes in value. If a financial value follows a random walk then the market for that value is informationally efficient (more precisely, weak-form efficient) with respect to past values (i.e., technical analysis). However, a value does not have to be a random walk in order to be informationally efficient. Market efficiency is better understood as a condition that all markets possess to some degree and no market possesses perfectly. The best question is not “Is that market informationally efficient”, it is “How efficient is that market?”

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