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- Title
SECURITY PRICES AS MARKOV PROCESSES.
- Authors
Ryan, Terence M.
- Abstract
The purpose of this article is to explore the relevance of the theory of Markov processes to the analysis of stock price movements. The present study was prompted by the work of Dryden [6], in which aggregate data on United Kingdom share prices were analyzed within a Markovian framework, and which indicated that it might be fruitful to apply the Markov model to more disaggregated data, specifically to individual stock price data. Markov theory is seen to be relevant to the analysis of stock prices in two ways: 1. As a useful tool for making probabilistic statements about future stock price levels. In this role it constitutes an alternative to the more traditional regression forecasting techniques to which it is, in many ways, superior. 2. As an extension of the random walk hypothesis. It will be shown that under a fairly general partial-adjustment model of stock price determination, price movements which do not display the random walk characteristic may be interpreted as following a Markov process.
- Subjects
MARKOV processes; STOCK price forecasting; STOCK prices; STOCHASTIC processes; PROBABILITY theory; REGRESSION analysis
- Publication
Journal of Financial & Quantitative Analysis, 1973, Vol 8, Issue 1, p17
- ISSN
0022-1090
- Publication type
Article
- DOI
10.2307/2329745