Monday, November 16, 2009

Random Walk & Mean Reversion

The question of market efficiency has puzzled many experts. There is a group that stands by their belief that market is efficient and takes in to account all information available up to that point of time. Others vehemently oppose this and say that the market is a Random Walk and has a mind of its own.  Yet others believe in the theory of mean reversion and quote Horace (including Buffett)

I believe that market is efficient, but only on average and its displays mean reversion but ends up swinging to the other extreme and for large periods its just appears to be on a random walk in some territory. 

There are others still, who find patterns in this random dance and call it momentum, support, resistance, breakout etc. No expert has a unifying theory of the markets.

Will the real Einstein (of the markets) please stand up!

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