STAT244.Lecture.01 3

STAT244.Lecture.01 3 - RW: It is a martingale but not vice...

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I Random walk with zero or positive drift, trading rule cannot outperform buy and hold strategy I But there is some persistence in successive price changes I RW vs Martingale Martingale: E ( p t ) is independent of p t - 1 , p t - 2 , . . . But the distribution of p t depends on p t - 1 , p t - 2 , . . . This dependence cannot be exploited under martingale
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Unformatted text preview: RW: It is a martingale but not vice versa I Usual tests uphold RW, but RW model is not adequate for the investor; No obvious relationship between serial correlation and expected prots simple linear relationships are much too unsophicated (Fama and Blume, 1966, JB)...
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