Why Random Walks and Efficient Market Hypothesis are Wrong.
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- เผยแพร่เมื่อ 6 ต.ค. 2024
- Learn about Random Walks and Volatility, and why the Efficient Market Hypothesis is hated by technical analysts who actively trade stocks, because it implies that you can't beat the market. In this video, we are going to show why random walks fail to capture the true nature of stock and other financial markets, due to what is known as volatility clustering (clustered volatility).
Some economists imagine a world where stock markets follow an unpredictable path, where no one can tell if the market is going to go up or down. This is a random walk, and it’s the basis for the Efficient Market hypothesis. It was supposed to make pricing of financial instruments, such as stock options, much more accurate. But as we'll discover, real markets have hidden complexity which can’t be captured by such a simple analysis.
In today's video, we're diving into why the traditional random walk model falls short in capturing how financial markets really work, and introducing some advanced financial mathematics.
Here we're going to examine what a random walk is, and why you might want to use it for financial modelling. And we’re going to discuss a topic of great importance to understand stock market behavior - volatility clustering. But we’re also going to address the Elephant in the room - why do so many traders hate random walk models? And ultimately, why the Random Walk model fails.
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Problem is that clustered volatility can't help you predict future price changes.
Also, pleople who believe in random walks and EMH know that the market isn't 100% random, otherwise something like the medallion fund wouldn't exist. Also the smaller the traded stock is, the less efficient the market becomes and therefore also less random. But also: The problem is, the less random a stock is, the more traders want to profit, making it more traded and therefore less random in return.
The only constant in the stock market is that a well diversified portfolio goes up over time. The more ou try to profit from the volatility, the more it becomes a zero sum game, as in a trade, someone loses and the other wins.
Thanks, and definitely agree with your comments, and I like that they highlight that reality is more complex than the theory. Understanding volatility and the chaotic nature of markets I believe does help better understand markets and what to expect from them. I'm not necessarily trying to infer one thing or another - viewers can take out of this what you have - that essentially markets are still unpredictable, even if there is temporal clustering of volatility. If you wait long enough, it's difficult to disagree that some kind of diversified enough portfolio will go up, but I think there is a lot of room to explore around the requirements for that - all stock indices might eventually go up, but what about the stocks that make them up? Should you never buy individual stocks? How diversified do you need to be, and what's the impact on returns of that? Do you need to be internationally diversified (i.e. how true is this for any stock market)? How long do you have to wait (does this depend on nation - look at Japan)? How might this evolve through different periods in history (are we just in an exceptional time which is skewing returns higher)? How long to recover if a major slump comes? What do you do if you are approaching retirement? What's the effect on markets of participants just buying to match indices rather than on value? Lots of questions which I think are interesting to consider, and for which chaos theory provides some guide. Thanks again!
@feds
Markets are not efficient but effective
markets are effective as over time needs and concerns of different participants(sellers and buyers) are met,so we can say the market is not random but if one can understand the conditions of the market they can place themselves at a better risk exposure as risk can't be avoided so markets are not random or efficient but effective as price change is due the concerns and needs of participants being met and not met,this is where supply and demand model comes in and supply and demand doesn't promise predictability but forces one to be in the" Right Now" as the right Now allows you to decipher the ongoing conditions or actions at that price-time relationship
Hence one can't use Price to predict price,what I mean by using price to predict price I mean the use of TA-technical analysis so TA AND FA ARE BAD TOOOLS TO GET TRADES
Excellent as usual. Excited for the next one!
Thanks Brumor - super appreciate your support!
From my market technician perspective, this is awesome.
Thanks kareim27 - glad it had some value for you!
This video relies on several false assumptions.
The efficient market hypothesis has nothing to do with volatility, but rather it states all the available information is already priced in the stock. That is to say, if, for instance, the future growth of a company depends on the price of money, the current price of the stock will reflect the current interest rate and the best guess of near future rate changes.
So you're telling that EMH can be satistified without random walks proven. But this video proved random walk hypothesis is wrong. Am I correct?
@@mickkorrawit2386It's hard to tell because the thesis of the video is very muddled.
Either way, the EMH and random walks are two concepts largely independent of each other. Either can be true with the other being false.
@@mickkorrawit2386for what I can tell, he seems to think changes in volatility mean you can't have a random walk, or the markets aren't efficient, neither of which is true.
Peaks in volatility just mean the markets move more the days there are news to make them move..
And random walks don't require all steps to be of equal size. You can build a random walk out of any sequence of random variables, as long as their expectation is zero, as per the central limit theorem.
@@mickkorrawit2386that's not to say markets are actually efficient, just that his argument is bad.
@@KilgoreTroutAsf Crystal clear
Thank you. Great content, great channel. Nice and clear
Much appreciated!
Please keep posting your research
Thank you - appreciate your encouragement!
Great content, subscribed.
Thank you!
Wow🎉
You still cannot predict real markets. Both real and fake charts are functionally the exact same. The fundamentals that drive real price, and an RNG algorithm produce the same thing. Both are unpredictable.
这个视频好啊，回答了我心中的疑问。那应该用什么样的模型替代呢。很想和你交流一下。
Thank you!
good prez!
Thank you!!
👍👍👍
EMH and random walks is clearly nonsense and yet it must be promoted, since to say otherwise, would allow traders to enter into the correct belief systems so they could start on the correct path to decode what they see on the charts. And those that do uncover the truth such as the Medallion fund creators keep it to themselves and reap all the benefits.
😂 then you should be able to be a billionaire by now.
If it takes the smartest people in the world to beat the markets, then you have no chance, bud.
Has anyone here ever considered the stock market is just a simulation of a stock market. Where prices are essentially controlled. That the closing price of each bar is not really based on auction theory or supply and demand dynamics. That the closing price of the day is set by the auctioneers each day for all stocks. That price action is just an illusion?? Or is everybody here just drinking the Kool Aid?
Yah Jim Simon’s stated multiple times prices exhibit a random walk. They don’t use charting, they use machine learning
Hi
Can I contact you?
Hi - I haven't set up a contact for this channel yet, as it's still largely a hobby project. What did you want to ask?
I want to exchange information about fractals
@@fractalmanhattanI want to exchange information about fractals
Okay thanks - I'll try to add a contact soon. Please feel free to use the chat to post any ideas or questions in the meantime :)
You simply don't understand the deeper meaning and real usage of 'random walk & Efficient Market Hypothesi '.