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Random Walk, or Not?

| | Posted in: Big Ideas

A reader asked: “Do the equity markets still follow a random walk? Has CXO Advisory Group LLC completed an autocorrelation test of S&P 500 Index returns recently? It would be informative to discover if randomness still dominates daily, weekly, monthly, quarterly and annual equity returns.”


CXOadvisory.com has no original tests focused on autocorrelation of financial market returns.

However, you might find “Why the Story on Predictability Keeps Changing” interesting. This item summarizes an academic study concluding that the level of support for the random walk hypothesis depends on the mix of economic conditions (expansion-recession) during the test period.

You can search SSRN for papers addressing “random walk”. You can limit the search to very recent periods. For example, there are currently 25 papers mentioning “random walk” in their titles or abstracts posted during the past three months.

Note that failure of the random walk does not necessarily confer predictability. See “Different Paths to the Same (Disconcerting) Destination?”.

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