what is the difference between random walk theory and the efficient market hypothesis?

Answer 1

actually, the efficient market hypothesis is claiming that prices of securities fully reflect available information about securities. And it further states 3 forms of EMH.

1) strong form -stock prices reflect all information relevant to the firm, even including information available only to company insiders.

2) Semistrong form - stock prices already reflect all publicly available information. This information includes in addition to past prices, fundamental data on the firm's product line, quality of management, balance sheet composition, etc.

3) Weak form - this form states that stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices, trading volume, or short interest. It implies that trend analysis is fruitless. If such data ever conveyed reliable signals about future performance, all investors would have learned long since to exploit the signals. Ultimately, the signals lose their value as they become widely known.

While random walk theory is the notion that stock price changes are random and unpredictable. Randomly evolving stock prices are the necessary consequence of intelligent investors competing to discover relevant information before the rest of the market becomes aware of it.

Answer 2

I am not sure they have anything in common.

The random walk one builds a model where a security’s price (or that of another instrument; could be an index too) in a given period of time will move up or down with a probability defined by the normal distribution. It is most likely the price to change a little and less likely to change a lot. If you search for normal distribution and standard deviation in en.wikipedia.org you will be able to find very specific info.

Efficient market hypothesis is the proposition that market all participants together at one and the same time react to news about facts affecting the price of a security, that way moving the price as quickly as possible. Therefore in a truly efficient market (only a in theoretical existence by my opinion) nobody will be able to have an advantage of entering a market earlier than anyone else because they had the news earlier. Also it assumes that prices of securities immediately reflect the “collective knowledge” of the facts about the security and its perceived value.

Answer 3

The first answer is correct about the efficient market hypothesis.

Here's how it relates to the random walk: If markets are efficient, the price of a stock or index will follow a random walk because its price is only affected by unpredictable events happening at random time intervals.

Answer 4

A hypothesis is a refutable proposition. Almost all science progresses by formulation of hypothesis. Experiments are deisgned to refute or support the hypothesis. An experiment cannot prove a hypothesis, simply because the results of an experiment are unique while hypotheses are not - more than one hypothesis could be supported by the same result even if only one could be true. For this reason, null hypothesis are sometimes used - ie the hypothesis that two things are not related. A theory is a complete explanation of a set of phenomena that is supported by experimental evidence and is logically consistent. Theories are usually the result of multiple hypotheses that have been tested. The chances of a theory being wrong are very, very low because of this extensive support.

Answer 5

random walk is a not memory process
efficent market use measures of past data