The Analysis of Economic Time Series - Term Paper Example

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The paper presents, the empirically-supported theory of share prices' behavior which emerged in the form of the Efficient Markets Hypothesis (EMH). Prior to the development of the EMH, analysts assumed some degree of dependence across successful price changes…
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The Analysis of Economic Time Series
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Download file to see previous pages RWT basically stated that speculative price changes were independent and identically distributed so that the past price data had no predictive power for future share price movements. RWT also stated that the distribution of price changes from transaction to the transaction had finite variance. In addition, if transactions were fairly uniformly spread across time and were large in numbers, then the Central Limit Theorem suggested that the price changes would be normally distributed. (Please check your citation by using Harvard system ) Kendall (1953) calculated the first differences of twenty-two different speculative price series at weekly intervals from 486 to 2,387 terms. He concluded that the random changes from one term to the next were large and obfuscated any systematic effect which may be present. In fact, he stated that 'the data behaved almost like a wandering series' (random walk) (its not required here-check the way author has been cited) Specifically, an analysis of share price movement revealed little serial correlation, with the conclusion that there was very little predictability of movements in share prices for a week ahead without extraneous information. Subsequently, the pattern of market levels was generated and changes akin to real levels and changes in the Dow Jones Industrial Index. It also estimated the probability of different share price movements over time by using a frequency distribution of historical changes in the weekly market index and assumed weekly changes were independently drawn from a normal distribution with a mean of + 0.5 and a standard deviation of 5.0. The subsequent conclusion was that changes in security prices behaved as if they had been generated by a simple chance model. The fundamental concept behind random walk theory is that competition in perfect markets would remove excess economic profits, except for those parties who exercised some degree of market monopoly. This meant that a trader with specialized information about future events could profit from the monopolistic access to information, but that fundamental and technical analysts who rely on past information should not expect to have speculative gains. ...Download file to see next pagesRead More
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