Share prices or the prices of shares or stocks are dependent on a number of factors. According to a variety of financial and economic theories, the random walk hypothesis is implemented to follow the framework of share prices prevailing in the stock markets. This random walk hypothesis is also used to follow the patterns of asset prices, commodity prices, as well as foreign currency exchange rates.
The concept of random walk hypothesis states that, investors function in a rational manner free of any prejudice. The calculation of a share price is done on the basis of future expectations at any point of time. According to this situation, the information those are available at the present time influences the prices of shares. The share prices alter only if there is any new information coming up.
According to the definition, new information comes up on a random basis and share prices also get influenced on a random basis. Experimental studies have established that the share prices do not entirely accompany the random walk hypothesis.
In the short term, there is presence of low serial correlations and in the long term, there is the existence of stronger correlations. A wide range of factors control their potentials and behavior.
According to the statistics provided by a number of research studies, it has been observed that some of the greatest price variations from random walk theory occur due to temporal and seasonal behaviors.
To be specific, the yields received in the month of January are more than the returns received in any other month of the year and this is known as January effect. On Mondays, share prices get decreased to the highest degree in comparison to any other day of the week. These conditions have been noticed for more than 50 years in a variety of stock markets, but there is no satisfactory explanation as to why these conditions are prevalent.
According to the technical analysis, the majority of irregular deviations are utilized for drawing out information on price movements of the shares in the future from historical or past data. Behavioral finance states that the orderliness of share prices is largely dependent on the cognition and emotional influences of the investors.
Last Updated on : 26th June 2013