Random Walks in Finance and Physics

Abstract

The Introduction, Chap. 1, suggested that there is a resemblance of financial price histories to a random walk. It is therefore more than a simple curiosity that the first successful theory of the random walk was motivated by the description of financial time series. The present chapter will therefore describe the random walk hypothesis [21], as formulated by Bachelier for financial time series, in Section 3.2 and the physics of random walks [22], in Sect. 3.3. The mathematical description of random walks can be found in many books [23]. A classical account of the random walk hypothesis in finance has been published by Cootner [7].